TRANSOCEAN • PROXY STATEMENT & 2003 ANNUAL REPOR www.deepwater.com
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2003PROXY STATEMENT & 2003 ANNUAL REPORT CONTENTS BOARD OF DIRECTORS CORPORATE INFORMATION
Shareholders' Letter J. MICHAEL TALBERT Houston Office Chairman Transocean Inc. Notice of 2004 Annual General Meeting and Proxy Statement Transocean Inc. 4 Greenway Plaza Houston,Texas Houston,Texas 77046 713.232.7500 2003 Annual Report to Shareholders VICTOR E. GRIJALVA Chairman Internet Address: http://www.deepwater.com Supplement to Proxy Statement Hanover Compressor Company Houston,Texas
ARTHUR LINDENAUER Transfer Agent and Registrar ABOUT TRANSOCEAN INC. Retired Executive Vice President-Finance and Chief Financial Officer The Bank of New York Schlumberger Limited P.O. Box 11258 New York, New York Church Street Station We are the world's largest offshore drilling contractor with full or partial ownership in 96 mobile offshore drilling units, excluding the New York,New York 10286 ROBERT L. LONG 1.877.397.7229 70-rig fleet of TODCO, a publicly traded drilling company in which we own a majority interest. Our mobile offshore drilling fleet is President and Chief Executive Officer considered one of the most modern and versatile in the world due to our emphasis on technically demanding segments of the off- Transocean Inc. Internet Address: http://www.stockbny.com shore drilling business, including industry-leading positions in high-specification deepwater and harsh environment drilling units. We Houston,Texas E-mail Address: [email protected] have more than 10,000 employees worldwide. PAUL B. LOYD, JR. Former Chairman R&B Falcon Corporation Since launching the offshore drilling industry's first jackup drilling rig in 1954, we have achieved a long history of technological "firsts." Houston,Texas These innovations include the first dynamically positioned drillship, the first rig to drill year-round in the North Sea, the first semisub- Direct Purchase Plan mersible for sub-Arctic, year-round operations and the latest generation of ultra-deepwater semisubmersible rigs and drillships. MARTIN B. MCNAMARA The Bank of New York,the Transfer Agent for Transocean Inc., offers a Direct Purchase and Sale Plan Partner-In-Charge for the ordinary shares of Transocean Inc. called BuyDirect. For more information on the Plan, includ- Gibson, Dunn & Crutcher, LLP ing a complete enrollment package, please contact The Bank of New York at 1.877.397.7229. With an equity market capitalization in excess of $9 billion at February 27, 2004, which is the largest in the offshore drilling industry, Dallas,Texas the company's ordinary shares are traded on the New York Stock Exchange under the symbol "RIG." ROBERTO L. MONTI Auditors Retired Executive Vice President Transocean:We're never out of our depth® Exploration and Production Ernst & Young LLP Repsol YPF Houston,Texas Buenos Aires,Argentina TRANSOCEAN WORLDWIDE OPERATIONS RICHARD A. PATTAROZZI Stock Exchange Listing Retired Shell Oil Company Executive Transocean Inc. ordinary shares are listed on the New York Stock Exchange (NYSE) under the symbol Metairie, Louisiana RIG.The following table sets forth the high and low sales prices of the company’s ordinary shares for the periods indicated, as reported on the NYSE Composite Tape. KRISTIAN SIEM Norway Chairman and Chief Executive Officer 2 Siem Industries Inc. Price (in U.S. dollars) HIGH LOW 2 George Town, Cayman Islands 2002 IAN C. STRACHAN First Quarter 34.66 26.51 Chairman Second Quarter 39.33 30.00 Instinet Group Incorporated Third Quarter 31.75 19.60 UK New York, New York Fourth Quarter 25.89 18.10 2 1 2003 E. Canada 10 Caspian 1 First Quarter 24.36 19.87 Italy EXECUTIVE OFFICERS 1 Second Quarter 25.90 18.40 2 Third Quarter 22.43 18.50 Canary Islands J. MICHAEL TALBERT Fourth Quarter 24.85 18.49 1 Egypt Chairman US Gulf of Mexico UAE 5 3 1 1 3 1 SE Asia ROBERT L. LONG Financial Information 1 3 1 President and Chief Executive Officer 3 6 1 2 Financial analysts and shareholders desiring information about Transocean Inc. should write to the Investor Relations and Corporate Communications Department or call 713.232.7694. Information India JEAN P. C AHUZAC West Africa may also be obtained by visiting the company’s website at http://www.deepwater.com. 8 2 Executive Vice President and Chief Operating Officer 1 1 4 2
5 3 2 ERIC B. BROWN Australia Brazil Senior Vice President, General Counsel and Corporate Secretary 2 2 1 GREGORY L. CAUTHEN 2 2 Senior Vice President and Chief Financial Officer 2 TIM L. JURAN Vice President, Human Resources
BARBARA S. KOUCOUTHAKIS Vice President and Chief Information Officer 5th Generation Deepwater Drillships Other Deepwater1 Drillships Other High Specification Semisubmersibles Other Semisubmersibles Inland Barges JAN RASK 5th Generation Deepwater Semisubmersibles Other Deepwater Semisubmersibles Other Drillships Jackups Tenders President and Chief Executive Officer,TODCO
As of February 27, 2004. Excludes our platform drilling unit, mobile offshore production unit, land rig and coring drillship and the 70-rig fleet of TODCO, a publicly traded drilling company in which we own a majority interest. For a complete listing of our fleet, see pages A-6 to A-9.
About the Cover: The Discoverer Deep Seas, for the first time in the offshore drilling industry's history, drilled in more than 10,000 feet of water, setting a new world water-depth drilling record at 10,011 feet of water in November 2003 for ChevronTexaco in the U.S.Gulf of Mexico. The Discoverer Deep Seas is one of 32 high-specification drillships and semisubmersibles in Transocean's fleet,28 of which form the world's largest deepwater drilling rig fleet capable of working in more than 4,500 feet of water.
Forward-Looking Statements: Any statements included in this Proxy Statement and 2003 Annual Report that are not historical facts, including without limitation statements regarding future results and operations, are forward-looking statements within the meaning of applicable securities laws. Such statements are subject to numerous risks and uncertainties (including, but not limited to, those that can be found on pages A-46 to A-50 of this Proxy Statement and 2003 Annual Report) that could cause actual results to differ materially from those projected. To Our Shareholders,
Before the year commenced, 2003 was understood to be potentially difficult for our business. With the United States poised to disarm the Iraqi leadership, crude oil prices began the year averaging more then $30 per barrel. In addition, U.S. economic performance was inconsistent and world economic growth potential was in question, leading to an anticipated flat spending scenario from our customer base. We also entered 2003 with an over- supply of certain types of offshore drilling rigs, specifically deepwater and conventional semisubmersibles and drillships. As the year progressed, this uninspiring demand scenario indeed played out. Despite a year with crude oil and U.S. natural gas prices averaging their highest levels in five years, at $30.99 per barrel and $5.19 a unit, respectively, exploration and production spending by our customers remained subdued. This trend, together with the oversupply of certain classes of drilling rigs, contributed to our poor financial performance in 2003, as our fleet utilization, revenues and net income declined relative to 2002 levels.
For the twelve months ended December 31, 2003, the company reported net income of $19.2 million, or $0.06 per diluted share, on revenues of $2,434.3 million. The 2003 reported net income compared to a net loss for 2002 of $3,731.9 million, or $11.69 per diluted share, on revenues of $2,673.9 million. Excluding the after- tax impact of $17.4 million in restructuring charges pertaining to our operations in Nigeria, costs of $8.8 mil- lion relating to the initial public offering (IPO) of TODCO, our Gulf of Mexico Shallow and Inland Water busi- ness segment, which was operated as a wholly owned subsidiary, asset impairment charges of $26.4 million, early debt-retirement losses of $13.8 million and a $14.6 million favorable resolution of a non-U.S. income tax liability, net income in 2003 was $71.0 million, or $0.22 per diluted share. The 2003 operating results compared to net income during the twelve months of 2002 (before the impact of non-cash charges relating to goodwill and asset impairments of $4,239.7 million and $33.5 million, respectively, and a tax benefit of $175.7 million) of $365.6 million, or $1.15 per diluted share. During 2003, our mobile offshore drilling fleet experienced a reduction in fleet utilization to 57% from 59% in 2002, while the average dayrate for the fleet declined to $67,200 in 2003 from $74,800 in 2002. Our 32-rig High Specification Floater fleet, which includes 28 rigs capable of operating in water depths of 4,500 feet and greater, accounted for 54% of the company’s revenues in 2003. The average utilization and dayrate for this segment of our fleet declined to 80% and $143,000, respec- tively, in 2003 from 86% and $146,100, respectively, in 2002. Despite the reduced level of profitability in 2003, we maintained a strong level of cash flow from operations, totaling $525.8 million.
While our 2003 financial performance was disappointing, we remained focused throughout the year on several initiatives that should improve future profitability through lower personnel and maintenance costs. During 2003, we continued our focus on hiring and training citizens of the countries in which we operate and have successfully reduced our reliance on expatriate personnel. This initiative has not only reduced costs, but has also provided the benefit of improving our standing in the countries in which we operate and supported our relationship with national oil companies. Our maintenance-optimization effort progressed further, allowing us to reduce maintenance capital and expense on our fleet. Also, we reduced our global regional office management structure from six offices to four by combining management and support efforts while reducing our Houston- based support staff.
i Other achievements in 2003 included $1,020 million of long-term debt reduction, bringing total debt at December 31, 2003 to $3,658 million. In addition, we purchased ConocoPhillips’ interests in two joint ventures that purchased the high-specification deepwater rigs Deepwater Frontier and Deepwater Pathfinder which were previously leased by the joint ventures under synthetic lease financing arrangements. Also, as a testament to our deepwater technical expertise, we drilled the industry’s first well to exceed the 10,000 foot water-depth barrier for ChevronTexaco in 10,011 feet of water in the U.S. Gulf of Mexico, utilizing the drillship Discoverer Deep Seas. Finally, in February 2004, we completed the IPO of TODCO, selling 13.8 million shares, or 23% of TODCO’s total outstanding shares. Net proceeds received by Transocean in the IPO totaled approximately $156 million, which we expect to utilize primarily for debt reduction.
As we enter 2004, the outlook for the offshore contract drilling business is improving. Fundamental to our business, global energy demand is increasing, led by a growing U.S. economy and rapid expansion in other markets like China and India. OPEC has recently cut crude oil production and we are approaching a seasonally low demand period for the commodity, this at a time when U.S. crude stocks are at historically low levels. Some national oil companies are expected to increase exploration and production spending in 2004 as they work to achieve long-term goals for energy self-sufficiency. We also hope to see increased drilling activity among the integrated and independent oil and gas companies as some struggle to reverse declining production curves and replace reserve bases.
Since the beginning of the 2004, we have received contracts on seven of our High-Specification Floater rigs for drilling programs in Brazil, Nigeria, eastern Canada, the U.K. sector of the North Sea and in Norway, where offshore rig demand has seen a sudden increase relative to demand levels over the past two years. Four of these programs are for contract durations exceeding 12 months. The deepwater component of this fleet, representing 28 rigs, is expected to see increased demand for both exploration and development drilling programs, particularly in the U.S. Gulf of Mexico and West Africa, driven primarily by a continuation of exploration success. Recently, the Minerals Management Service, a division of the U.S. Interior Department, announced that a record 12 rigs were working in greater than 5,000 feet of water in the U.S. Gulf of Mexico, a strong indication of deepwater interest from oil and gas companies. Eight of the 12 rigs were Transocean deepwater units.
Our company has seen tremendous change in the offshore drilling business in a relatively short period of time, not the least of which has been the contraction of our customer base through mergers and acquisitions. Our company has adapted to this industry change and is today a company with depth. This depth is created and supported by our diverse asset base and personnel, fleet geographic distribution, broad customer base, technical leadership, focused management team and financial capacity. Our depth will serve us well through the future cycles in offshore drilling and we will continue to emphasize operational excellence for our customers, an incident-free work environment for our employees and further alignment of management and shareholder interests.
Sincerely,
J. Michael Talbert Robert L. Long Chairman President and Chief Executive Officer March 19, 2004 ii March 19, 2004
Dear Shareholder:
The 2004 annual general meeting of Transocean Inc. will be held on Thursday, May 13, 2004 at 9:00 a.m., at the Royal Pavilion Hotel, St. James, Barbados. The Secretary’s notice of annual general meeting, the proxy statement and a proxy card are enclosed and describe the matters to be acted upon at the meeting.
It is important that your shares be represented and voted at the meeting. Please read the enclosed notice of annual general meeting and proxy statement and date, sign and promptly return the proxy card in the enclosed self-addressed envelope.
Sincerely,
J. Michael Talbert Robert L. Long Chairman of the Board President & Chief Executive Officer
This proxy statement and the accompanying proxy card are dated March 19, 2004 and are first being mailed on or about March 25, 2004 to record shareholders as of March 18, 2004.
NOTICE OF ANNUAL GENERAL MEETING OF TRANSOCEAN INC. TO BE HELD MAY 13, 2004
The annual general meeting of Transocean Inc., a Cayman Islands exempted company limited by shares, will be held at the Royal Pavilion Hotel, St. James, Barbados at 9:00 a.m., Barbados time, on Thursday, May 13, 2004 for the following purposes:
1. To elect four directors as members of our board of directors to serve until the 2007 annual general meeting and until their respective successors have been duly elected.
2. To approve the amendment of our Long-Term Incentive Plan to (1) increase the number of ordinary shares reserved for issuance to employees under the plan from 18,900,000 to 22,900,000, (2) increase the number of ordinary shares that may be issued to employees under the plan as restricted shares or deferred units from 2,000,000 to 6,000,000, (3) provide for the award of deferred units, (4) replace automatic awards to outside directors with discretionary awards that are determined by our board, (5) restate the performance criteria specified in the plan for certain types of awards, (6) allow net share counting in determining the number of shares available for issuance under the plan and (7) modify other provisions of the plan as described in the proxy statement.
3. To approve the appointment of Ernst & Young LLP as independent auditors for 2004.
4. To transact such other business as may properly be brought before the meeting.
This constitutes notice of the meeting as required by Cayman Islands law and our articles of association.
Only record holders of ordinary shares at the close of business on Thursday, March 18, 2004 will be entitled to notice of, and to vote at, the meeting.
The meeting may generally be adjourned from time to time without advance notice other than announcement at the meeting, or any adjournment thereof, and any and all business for which the meeting is hereby noticed may be transacted at any such adjournment.
By order of the Board of Directors,
Eric B. Brown Secretary
Houston, Texas March 19, 2004
YOUR VOTE IS IMPORTANT Please complete, sign and promptly return your proxy card in the enclosed return envelope.
PROXY STATEMENT FOR ANNUAL GENERAL MEETING OF TRANSOCEAN INC. MAY 13, 2004
This proxy statement is furnished in connection with the solicitation of proxies by Transocean Inc., on behalf of our board of directors, to be voted at our annual general meeting to be held on Thursday, May 13, 2004 at 9:00 a.m., at the Royal Pavilion Hotel, St. James, Barbados.
Proposals
At the annual general meeting, shareholders will be asked to vote upon the following:
• A proposal to elect four nominees as directors to serve three-year terms. These directors will be members of a class of directors that will serve until the 2007 annual general meeting and until their respective successors have been duly elected.
• A proposal to approve the amendment of our Long-Term Incentive Plan to (1) increase the number of ordinary shares reserved for issuance to employees under the plan from 18,900,000 to 22,900,000, (2) increase the number of ordinary shares that may be issued to employees under the plan as restricted shares or deferred units from 2,000,000 to 6,000,000, (3) provide for the award of deferred units, (4) replace automatic awards to outside directors with discretionary awards that are determined by our board, (5) restate the performance criteria specified in the plan for certain types of awards, (6) allow net share counting in determining the number of shares available for issuance under the plan and (7) modify other provisions of the plan as described under “Proposal to Amend Our Long-Term Incentive Plan.”
• A proposal to approve the appointment of Ernst & Young LLP as independent auditors for 2004.
• Any other matters that may properly come before the meeting.
We know of no other matters that are likely to be brought before the annual general meeting.
Quorum
The presence, in person or by proxy, of shareholders holding a majority of our outstanding ordinary shares will constitute a quorum. Abstentions and “broker non-votes” will be counted as present for purposes of determining whether there is a quorum at the meeting.
Record Date
Only shareholders of record at the close of business on Thursday, March 18, 2004 are entitled to notice of and to vote, or to grant proxies to vote, at the meeting.
Votes Required
Approval of the proposal to elect the four nominees as directors requires the affirmative vote of a plurality of the votes cast. Abstentions and “broker non-votes” will not be counted in that vote.
Approval of the proposal to amend our Long-Term Incentive Plan requires the affirmative vote of the holders of at least a majority of votes cast on the proposal, provided that the total number of votes cast on the proposal represents a majority of the votes entitled to be cast. Abstentions and “broker non-votes” on this proposal will not affect the voting on the proposal as long as holders of a majority of ordinary shares cast votes on the proposal. Otherwise, the effect of an abstention or “broker non-vote” is a vote against the proposal. The New York Stock Exchange prohibits its member organizations from giving a proxy to vote on an equity compensation plan unless the beneficial owner of the share has given instructions. As a result, beneficial owners are encouraged to give voting instructions to their brokers.
Approval of the proposal to appoint Ernst & Young LLP as independent auditors requires the affirmative vote of holders of at least a majority of the ordinary shares present in person or by proxy at the meeting and entitled to vote on the matter. Abstentions and “broker non-votes” on the proposal have the effect of a vote against the proposal.
As of the record date for the meeting, there were 320,751,973 ordinary shares outstanding and entitled to notice of and to vote at the meeting. Holders of ordinary shares on the record date are entitled to one vote for each share held.
Proxies
A proxy card is being sent to each shareholder as of the record date. If you properly received a proxy card, you may grant a proxy to vote on each of the four proposals by marking your proxy card appropriately, executing it in the space provided, dating it and returning it to us. We may accept your proxy by any form of communication permitted by Cayman Islands law and our articles of association. If you hold your shares in the name of a bank, broker or other nominee, you should follow the instructions provided by your bank, broker or nominee when voting your shares.
If you have timely submitted a properly executed proxy card and clearly indicated your votes, your shares will be voted as indicated. If you have timely submitted a properly executed proxy card and have not clearly indicated your votes, your shares will be voted “FOR” the election of all director nominees and “FOR” each of the other two proposals.
If any other matters are properly presented at the meeting for consideration, the persons named in the proxy card will have the discretion to vote on these matters in accordance with their best judgment. Proxies voted against any of the three proposals will not be voted in favor of any adjournment of the meeting for the purpose of soliciting additional proxies.
You may revoke your proxy card at any time prior to its exercise by:
• giving written notice of the revocation to our Secretary;
• appearing at the meeting, notifying our Secretary and voting in person; or
• properly completing and executing a later-dated proxy and delivering it to our Secretary at or before the meeting.
Your presence without voting at the meeting will not automatically revoke your proxy, and any revocation during the meeting will not affect votes previously taken. If you hold your shares in the name of a bank, broker or other nominee, you should follow the instructions provided by your bank, broker or nominee in revoking your previously granted proxy.
Solicitation of Proxies
The accompanying proxy is being solicited on behalf of the board of directors. The expenses of preparing, printing and mailing the proxy and the materials used in the solicitation will be borne by us. We have retained D. F. King & Co., Inc. for a fee of $6,000, plus expenses, to aid in the solicitation of proxies. Proxies may be solicited by personal interview, telephone and telegram by our directors, officers and employees, who will not receive additional compensation for those services. Arrangements also may be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of
2 ordinary shares held by those persons, and we will reimburse them for reasonable expenses incurred by them in connection with the forwarding of solicitation materials.
ELECTION OF DIRECTORS
Our articles of association divide our board of directors into three classes: Class I, Class II and Class III. Four Class II directors are to be elected at our 2004 annual general meeting to serve for three-year terms expiring at the annual general meeting in 2007. Our board of directors has increased the size of the board from 10 to 11 directors to be effective at the upcoming annual general meeting.
The board has nominated for election as Class II directors Robert L. Long, Martin B. McNamara, Robert M. Sprague and J. Michael Talbert. Mr. Sprague is not currently a director and is being nominated to fill the new board seat resulting from the increase in board size. Messrs. Long, McNamara and Talbert are standing for re- election. If any of the nominees becomes unavailable for any reason, which we do not anticipate, the board of directors in its discretion may designate a substitute nominee. If you have submitted an executed proxy card, your vote will be cast for the substitute nominee unless contrary instructions are given in the proxy.
The board of directors recommends a vote “FOR” the election of Robert L. Long, Martin B. McNamara, Robert M. Sprague and J. Michael Talbert as Class II directors.
Nominees for Director—Class II—Terms Expiring 2007
ROBERT L. LONG, age 58, is President, Chief Executive Officer and a member of our board of directors. Mr. Long served as President from December 2001 to October 2002, at which time he assumed the additional position of Chief Executive Officer. Mr. Long also served as Chief Operating Officer from June 2002 until October 2002, Chief Financial Officer from August 1996 until December 2001, as Senior Vice President from May 1990 until the time of the Sedco Forex merger, at which time he assumed the position of Executive Vice President, and as Treasurer from September 1997 until March 2001. Mr. Long has been an employee since 1976 and was elected Vice President in 1987. Mr. Long is also a director of TODCO, a publicly traded drilling company in which we own a majority interest.
MARTIN B. MCNAMARA, age 56, is Partner-in-Charge of the Dallas, Texas, office of the law firm of Gibson, Dunn & Crutcher and a member of the firm’s finance and compensation committees. He has served as one of our directors since November 1994. During the past five years, Mr. McNamara has been in the private practice of law.
ROBERT M. SPRAGUE, age 58, is the retired Regional Business Director of Shell EP International BV, a position in which he served from April 1997 until June 2003. Mr. Sprague served as Director – Strategy & Business Services for Shell EP International BV from January 1996 until March 1997 and as Exploration & Production Coordinator of Shell International Petroleum BV from May 1994 to December 1995. Mr. Sprague joined the Royal Dutch / Shell group of companies in 1967 and served in a variety of positions in the United States and Europe during his career, including as a director of Shell Canada Limited, a publicly traded company, from April 2000 to April 2003. Mr. Sprague is not currently one of our directors.
J. MICHAEL TALBERT, age 57, has served as Chairman of our board of directors since October 2002 and a member of our board of directors since August 1994. Mr. Talbert also served as Chief Executive Officer from August 1994 until October 2002, Chairman of our board of directors from August 1994 until December 1999, and as President from December 1999 until December 2001. Prior to assuming his duties with us, Mr. Talbert was President and Chief Executive Officer of Lone Star Gas Company, a natural gas distribution company and a division of Ensearch Corporation. He is also a director of El Paso Corporation and of TODCO.
3 Continuing Directors—Class III—Terms Expiring 2005
PAUL B. LOYD, JR., age 57, has served as one of our directors since the R&B Falcon merger. Before the merger, he served as Chairman of the Board of R&B Falcon since January 1998 and Chief Executive Officer since April 1999. He was CEO and Chairman of the Board of R&B Falcon Drilling (International & Deepwater) Inc. (formerly Reading & Bates Corporation) from 1991 through 1997. Mr. Loyd has over 30 years of experience in the offshore drilling industry, having joined Reading & Bates in 1970 in its management-training program. He is also a director of Carrizo Oil & Gas, Inc. and Frontier Oil Corporation and is on the Board of Trustees of Southern Methodist University.
ROBERTO MONTI, age 64, is the retired Executive Vice President of Exploration and Production for Repsol YPF. He was the President and Chief Executive Officer of YPF Sociedad Anonima from September 1995 to June 1999 prior to its acquisition by Repsol. From October 1993 to July 1995, he served as President of Dowell, a division of Schlumberger. He is also a director of Pecom Energía S.A. Mr. Monti has served as one of our directors since the Sedco Forex merger described below.
IAN C. STRACHAN, age 60, is Chairman of the Board of Instinet Group Incorporated and a director of Reuters Group PLC, Xstrata plc, Rolls Royce Group plc and Johnson Matthey plc. He served as Deputy Chairman of Invensys plc from 1999 to 2000. He served as CEO of BTR plc from 1996 until its merger with Siebe plc in 1999, when it changed its name to Invensys plc. From 1987 to 1995, Mr. Strachan was with Rio Tinto plc, serving as CFO from 1987 to 1991 and as Deputy CEO from 1991 to 1995. He was employed by Exxon Corporation from 1970 to 1986. Mr. Strachan has served as one of our directors since the Sedco Forex merger.
Continuing Directors—Class I—Terms Expiring 2006
VICTOR E. GRIJALVA, age 65, is Chairman of the Board of Hanover Compressor Company. Mr. Grijalva has been a director since the Sedco Forex merger and served as Chairman of our board of directors until October 2002. He is the retired Vice Chairman of Schlumberger Limited. Before serving as Vice Chairman, he served as Executive Vice President of Schlumberger’s Oilfield Services division from 1994 to January 1999 and as Executive Vice President of Schlumberger’s Wireline, Testing & Anadrill division from 1992 to 1994. Mr. Grijalva is also an advisory director of Tenaris S.A.
ARTHUR LINDENAUER, age 66, became Chairman of the Board of Schlumberger Technology Corporation, the principal U.S. subsidiary of Schlumberger Limited, in December 1998 and served in that position through February 2004. He previously served as Executive Vice President-Finance and Chief Financial Officer of Schlumberger from January 1980 to December 1998. Mr. Lindenauer was a partner with the accounting firm of Price Waterhouse from 1972 to 1980. Mr. Lindenauer is also a director of TODCO and the New York Chapter of the Cystic Fibrosis Foundation, a Trustee of the American University in Cairo and a member of the Board of Overseers of the Tuck School of Business at Dartmouth College. Mr. Lindenauer has served as one of our directors since the Sedco Forex merger.
RICHARD A. PATTAROZZI, age 60, served at Shell Oil Company as President and CEO of Shell Deepwater Development Inc. and Shell Deepwater Production Inc. from 1996 to 1999. In early 1999, he was promoted to Vice President of Shell Oil Company, responsible for Shell Deepwater Development Inc., Shell Deepwater Production Inc. and the company’s Shallow Water Gulf of Mexico exploration and production business and retired in January 2000. Mr. Pattarozzi joined Shell in 1966 in its offshore engineering organization and has more than 33 years of experience in the petroleum industry. Mr. Pattarozzi has served as one of our directors since the merger with R&B Falcon Corporation described below. Before the merger, he had served as a director of R&B Falcon since February 2000. He is also a director of Superior Energy Services, Inc., FMC Technologies, Inc., Global Industries, Ltd., Stone Energy Company and Tidewater, Inc., all of which are publicly traded.
KRISTIAN SIEM, age 55, is Chairman and Chief Executive Officer of Siem Industries, Inc., an industrial holding company that owns offshore oil and gas drilling and subsea construction services businesses, a fleet of reefer vessels and a fleet of car carrying vessels through subsidiaries in Bermuda, the U.K. and Norway.
4 Mr. Siem has served as one of our directors since September 1996 and was Chairman of Transocean ASA prior to its acquisition by us in 1996. Mr. Siem is also chairman of DSND Inc., Subsea 7 Inc., Star Reefers Inc. and Four Seasons Capital A.B. During the past five years, Mr. Siem has served as an executive officer with Siem Industries, Inc. and as Chairman of Wilrig AS, and on the boards of Kvaerner ASA, Norwegian Cruise Line, Lambert Fenchurch Group Holdings plc and Oslo Reinsurance ASA. He was also a member of the board of directors of Saga Petroleum ASA until its merger with Norsk Hydro in September 1999.
Merger with R&B Falcon and Designation of Board Members
On January 31, 2001, we completed a merger transaction with R&B Falcon Corporation (“R&B Falcon”) in which common shareholders of R&B Falcon received 0.5 newly issued ordinary shares for each R&B Falcon share and R&B Falcon became our indirect wholly owned subsidiary. Pursuant to the merger agreement, our board elected three new members who were designated by R&B Falcon in consultation with us and had previously served on the R&B Falcon board of directors. Two of those directors, Messrs. Loyd and Pattarozzi, continue to serve on our board of directors. On December 12, 2002, R&B Falcon changed its name to TODCO. On February 10, 2004, TODCO completed an initial public offering in which we sold a minority interest in TODCO to the public.
Merger with Sedco Forex, Designation of Board Members and Appointment of Mr. Grijalva
On December 31, 1999, we completed a merger with Sedco Forex Holdings Limited following the spin-off of Sedco Forex to Schlumberger stockholders on December 30, 1999. As a result of the merger, Schlumberger stockholders exchanged all of the Sedco Forex shares distributed to them by Schlumberger in the Sedco Forex spin- off for our ordinary shares, and Sedco Forex became our wholly owned subsidiary. Pursuant to the merger agreement, Transocean’s board of directors designated Messrs. McNamara, Siem and Talbert as directors and Schlumberger’s board of directors designated Messrs. Grijalva, Lindenauer, Monti and Strachan as directors. In the merger agreement, we agreed to nominate Mr. Grijalva to our board of directors to serve as Chairman until his 65th birthday (in July 2003). In October 2002, Mr. Grijalva resigned his position as Chairman but agreed to remain as a director.
Corporate Governance
We believe that we have long had good corporate governance practices, including having had written corporate governance guidelines, committee charters and a code of conduct for employees in place before enactment of the Sarbanes-Oxley Act and revisions to the corporate governance rules of the New York Stock Exchange (NYSE). Furthermore, the board has held separate meetings of the non-management directors for several years.
In connection with the changing governance environment and in accordance with the Sarbanes-Oxley Act and new NYSE rules, however, we have re-examined and strengthened our corporate governance guidelines, committee charters and code of conduct and ethics. Our committee charters require, among other things, that the Committees and the board evaluate their own performance. We adopted our new corporate governance guidelines, committee charters and code of conduct and ethics during 2003 and further revised them in early 2004. These governance documents may be found on our website at www.deepwater.com under “Corporate Governance.” Information contained on our website is not part of this proxy statement.
We will continue to monitor our governance practices in order to maintain our high standards. Some specific governance issues are addressed below.
Independence of Board Members/Committee Structure. Our corporate governance guidelines require that at least a majority of the directors meet the independence requirements of the NYSE. The board has carefully considered the criteria of the NYSE and believes that Arthur Lindenauer, Martin McNamara, Roberto Monti, Richard Pattarozzi, Ian Strachan and Robert Sprague are independent. In particular, the board reviewed the relationships that these directors (or director candidate, in the case of Mr. Sprague) had with our company and found that none are affiliated with any material customer or supplier of our company or are part of any charitable organization that received any significant contribution from our company and no director received any compensation other than the director compensation set forth in this proxy statement. In addition, the board believes
5 that Kristian Siem is also independent, although we have requested clarification from the NYSE on the application of its per se independence disqualification rules to Mr. Siem in connection with the transactions described under “Certain Transactions.” The board based this belief on its view that the transactions did not materially affect Mr. Siem’s relationship with us due to the size of those transactions in comparison with the size of DSND Inc. The board also determined that our contribution to a scholarship fund for American University in Cairo, of which Mr. Lindenauer serves as a Trustee, was not a material relationship based on the insignificant amount of our contribution and the fact that Mr. Lindenauer did not request us to make that contribution. We have restructured our Executive Compensation, Audit and Corporate Governance Committees so that, going forward, they are composed solely of independent directors under the new standards.
Presiding Director for Executive Sessions. The nonmanagement directors met in executive session at each regularly scheduled board meeting in 2003. During 2004, they are scheduled to meet in executive session without management at each regularly scheduled board meeting as well. The board has designated Ian Strachan as the presiding director for their meetings of nonmanagement directors. Shareholders or other interested persons may send communications to the presiding director by writing to him c/o Mr. Eric B. Brown, Corporate Secretary, P.O. Box 2765, Houston, TX 77252-2765.
Director Nomination Process. The board has designated the Corporate Governance Committee as the committee authorized to consider and recommend nominees for the board. We believe that all members of the Committee met the NYSE independence requirements at the time of its recommendation of candidates to the board. The Committee has since been restructured so that, going forward, all members of the Committee will be independent under the revised NYSE standards.
Our Corporate Governance Guidelines require that the Governance Committee assess the needs of our company and the board so as to recommend candidates who will further our goals. In making that assessment, the Committee has determined that a candidate must have the following minimum qualifications:
• high professional and personal ethics and values;
• a record of professional accomplishment in his/her chosen field;
• relevant expertise and experience; and
• a reputation, both personal and professional, consistent with our core values.
In addition to these minimum qualities, the Committee considers other qualities that may be desirable. In particular, the board is committed to having a majority of independent directors and, accordingly, the Committee evaluates the independence status of any potential director. The Committee evaluates whether or not a candidate contributes to the board’s overall diversity and whether or not the candidate can contribute positively to the existing chemistry and culture among the board members. Also, the Committee considers whether or not the candidate may have professional or personal experiences and expertise relevant to our business and position as the leading international provider of offshore drilling services.
The Committee has several methods of identifying candidates. First, the Committee considers and evaluates whether or not the existing directors whose terms are expiring remain appropriate candidates for the board. Second, the Committee requests from time to time that its members and the other board members identify possible candidates. Third, the Committee has the authority to retain one or more search firms to aid in its search. Robert Sprague was initially identified by a board member and then included in a group of candidates to be reviewed by a search firm retained by the Committee. The search firm assisted us in identifying potential board candidates, interviewing those candidates and conducting investigations relative to their background and qualifications.
The corporate governance committee will consider nominees for director recommended by shareholders. Please submit your recommendations in writing, along with:
• a resume of the nominee’s qualifications and business experience;
6 • a signed statement of the proposed candidate consenting to be named as a candidate and, if nominated and elected, to serve as a director;
• a statement that the writer is a shareholder and is proposing a candidate for consideration by the Committee;
• the name of and contact information for the candidate;
• a statement detailing the candidate’s business and educational experience;
• information regarding the qualifications and qualities described under “Director Nomination Process” above;
• a statement detailing any relationship between the candidate and any customer, supplier or competitor of ours;
• financial and accounting background, to enable the Committee to determine whether the candidate would be suitable for audit committee membership; and
• detailed information about any relationship or understanding between the proposing shareholder and the candidate.
Submit nominations to Eric B. Brown, Corporate Secretary, Transocean Inc., 4 Greenway Plaza, Houston, Texas 77046. The extent to which the Committee dedicates time and resources to the consideration and evaluation of any potential nominee brought to its attention depends on the information available to the Committee about the qualifications and suitability of the individual, viewed in light of the needs of the board, and is at the Committee’s discretion. The Committee evaluates the desirability for incumbent directors to continue on the board following the expiration of their respective terms, taking into account their contributions as board members and the benefit that results from increasing insight and experience developed over a period of time. Although the corporate governance committee will consider candidates for director recommended by shareholders, it may determine not to recommend that the board, and the board may determine not to, nominate those candidates for election to our board.
In addition to recommending director nominees to the Committee, any shareholder may nominate directors at an annual general meeting. For more information on this topic, see “Proposals of Shareholders.”
Process for Shareholder Communications with the Board. The board has established a process whereby interested parties may communicate with the board and/or with any individual director. Shareholders may send communications in writing, addressed to the board or an individual director, c/o Mr. Eric B. Brown, Corporate Secretary, P.O. Box 2765, Houston, TX 77252-2765. The Corporate Secretary will forward these communications to the addressee.
Director Attendance at Annual Meeting. We expect all our directors to attend our annual general meeting of shareholders. At the 2003 meeting, all directors were in attendance.
Compensation of Directors
We are proposing to amend our Long-Term Incentive Plan to replace automatic awards to outside directors as described below with discretionary awards that are determined by our board as described under “Proposal to Amend Our Long-Term Incentive Plan.” The board believes that directors should receive deferred units rather than options or share appreciation rights, commonly referred to as SARs. The board intends for such units to vest equally over a three-year period but be required to be held by a director until the director leaves the board. If the plan is approved by shareholders, the board intends to grant deferred units following the annual meeting to outside directors equal in value to $62,000, based upon the average price of our ordinary shares for the 10 trading days prior to the annual meeting. This grant would be in lieu of the current grants of stock options/stock appreciation rights discussed below. If the amendment of the plan is not approved, the board may review the fees and retainers
7 currently paid to the directors. The board may grant directors joining our board after the annual meeting an award but it has not yet made a determination. The current overall compensation of directors is described below.
Fees and Retainers. Our employees receive no extra pay for serving as directors. Each director who is not one of our officers or employees receives an annual retainer of $40,000, although Mr. Grijalva did not receive this retainer during a portion of 2003 because he was a party to a consulting agreement with us that terminated in July 2003. The audit committee chairman receives an additional $20,000 annual retainer, and the other committee chairmen each receive an additional $10,000 annual retainer. Nonemployee directors also receive a fee of $2,000 for each board meeting and $1,500 for each board committee meeting attended, plus incurred expenses where appropriate. Directors are eligible to participate in our deferred compensation plan. The director may defer any fees or retainer by investing those amounts in Transocean ordinary share equivalents or in other investments selected by the administrative committee of that plan.
Stock Options/Stock Appreciation Rights. When elected, each outside director is currently granted an option to purchase 4,000 ordinary shares at the fair market value of those shares on the date of grant. Following the initial grant, if the outside director remains in office, the director is currently granted an additional option to purchase 6,000 ordinary shares after each annual general meeting at the fair market value of those shares on the date of grant. Directors residing in certain countries may receive SARs instead of options.
Each stock option and SAR granted to a director has a ten-year term and becomes exercisable in equal annual installments on the first, second and third anniversaries of the date of grant assuming continued service on the board. In the event of an outside director’s retirement in accordance with the board’s retirement policy or his earlier death or disability, or in the event of a change of control of our company as described under “Compensation of Executive Officers—Compensation Upon Change of Control,” options and SARs will become immediately exercisable and will remain exercisable for the remainder of their ten-year term. Options and SARs will terminate 60 days after an outside director leaves the board for any other reason. However, if that person ceases to be a director for our convenience, as determined by the board, the board may at its discretion accelerate the exercisability and retain the original term of those options and SARs. This treatment was afforded the options of Alain Roger in connection with his retirement from the board in 2003. In connection with Ronald L. Kuehn, Jr.’s resignation from the board in 2003, the board determined that his previously vested options would remain exercisable for the remainder of their ten-year terms.
We have reserved an aggregate of 600,000 ordinary shares for issuance to outside directors under our Long-Term Incentive Plan, of which 205,481 remained available for grant as of March 1, 2004.
Board Meetings and Committees
During 2003, the board of directors held five regular meetings. Each of our directors attended at least 75% of the meetings during the year, including meetings of committees on which the director served.
The board has standing executive compensation, finance and benefits, corporate governance and audit committees. In addition, the board may from time to time form special committees to consider particular matters that arise.
Executive Compensation Committee. The executive compensation committee reviews and approves the compensation of our officers, administers our executive compensation programs, makes awards under the Long- Term Incentive Plan and the Performance Award and Cash Bonus Plan and establishes performance goals for our Chief Executive Officer and reviews his performance. The current members of the executive compensation committee are Mr. Pattarozzi, Chairman, and Messrs. Monti and Strachan. The executive compensation committee met five times during 2003.
Finance and Benefits Committee. The finance and benefits committee approves our long-term financial policies and annual financial plans, insurance programs and investment policies. It also makes recommendations to the board concerning dividend policy, the issuance and terms of debt and equity securities and the establishment of bank lines of credit. In addition, the finance and benefits committee approves the creation, termination and
8 amendment of certain of our employee benefit programs and periodically reviews the status of these programs and the performance of the managers of the funded programs. The current members of the finance and benefits committee are Mr. Siem, Chairman, and Messrs. Lindenauer, Loyd and Grijalva. The finance and benefits committee met four times during 2003.
Corporate Governance Committee. The corporate governance committee makes recommendations to the board with respect to the selection and compensation of the board, how the board functions and how the board should interact with shareholders and management. It reviews the qualifications of potential candidates for the board of directors, coordinates the self-evaluation of the board and committees and recommends to the board nominees to be elected at the annual meeting of shareholders. The current members of the corporate governance committee are Mr. McNamara, Chairman, and Messrs. Monti and Pattarozzi. The corporate governance committee met five times during 2003.
Audit Committee. The audit committee is directly responsible for the appointment, compensation, retention and oversight of our independent public accountants. The audit committee also monitors the integrity of our financial statements and the independence and performance of our auditors and reviews our financial reporting processes. The committee reviews and reports to the board the scope and results of audits by our outside auditor and our internal auditing staff and reviews the audit and other professional services rendered by the outside auditor. It also reviews with the outside auditor the adequacy of our system of internal controls. It reviews transactions between us and our directors and officers, our policies regarding those transactions and compliance with our business ethics and conflict of interest policies. The board of directors has adopted a written charter for the audit committee, which is attached as Appendix A to this proxy statement.
The board requires that all members of the committee meet the financial literacy standard required under the NYSE rules and that at least one member qualifies as having accounting or related financial management expertise under the NYSE rules. In addition, the SEC has adopted rules requiring that we disclose whether or not our audit committee has an “audit committee financial expert” as a member. An “audit committee financial expert” is defined as a person who, based on his or her experience, satisfies all of the following attributes:
• an understanding of generally accepted accounting principles and financial statements;
• an ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;
• experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and level of complexity of issues that can reasonably be expected to be raised by our financial statements, or experience actively supervising one or more persons engaged in such activities;
• an understanding of internal controls and procedures for financial reporting; and
• an understanding of audit committee functions.
The person is to further have acquired such attributes through one or more of the following:
• education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;
• experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;
• experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or
9 • other relevant experience.
The current members of the audit committee are Mr. Lindenauer, Chairman, and Messrs. McNamara and Strachan. The audit committee met eight times during 2003. The board has reviewed the criteria set by the SEC and determined that Arthur Lindenauer qualifies as an “audit committee financial expert.” Mr. Lindenauer is an accountant by education, was a partner in an accounting firm and served as the Chief Financial Officer of Schlumberger Limited, a public company.
Finally, NYSE rules restrict directors that have relationships with the company that may interfere with the exercise of their independence from management and the company from serving on the audit committee. We believe that the members of the audit committee have no such relationships and are therefore independent for purposes of NYSE rules.
AUDIT COMMITTEE REPORT
Our committee has reviewed and discussed the audited financial statements of the Company for the year ended December 31, 2003 with management, our internal auditors and Ernst & Young LLP. In addition, we have discussed with Ernst & Young LLP, the independent auditing firm for the Company, the matters required by Codification of Statements on Auditing Standards No. 61 (SAS 61). The Sarbanes-Oxley Act of 2002 requires certifications by the Company’s chief executive officer and chief financial officer in certain of the Company’s filings with the Securities and Exchange Commission (“SEC”). The committee discussed the review of the Company’s reporting and internal controls undertaken in connection with these certifications with the Company’s management and outside auditors. The audit committee has further periodically reviewed such other matters as it deemed appropriate, including other provisions of the Sarbanes-Oxley Act of 2002 and rules adopted or proposed to be adopted by the SEC and the NYSE.
The committee also has received the written disclosures and the letter from Ernst & Young LLP required by Independence Standards Board Standard No. 1, and we have reviewed, evaluated and discussed the written disclosures with that firm and its independence from the Company. We also have discussed with management of the Company and the auditing firm such other matters and received such assurances from them as we deemed appropriate.
Based on the foregoing review and discussions and relying thereon, we have recommended to the Company’s Board of Directors the inclusion of the Company’s audited financial statements for the year ended December 31, 2003 in the Company’s Annual Report on Form 10-K for such year filed with the SEC.
ARTHUR LINDENAUER, CHAIRMAN IAN C. STRACHAN
MARTIN B. MCNAMARA
SECURITY OWNERSHIP OF 5% BENEFICIAL OWNERS AND MANAGEMENT
The table below shows how many ordinary shares each of our directors and nominees, each of the executive officers named in the summary compensation section below and all directors and executive officers as a group owned as of January 31, 2004. The table below also sets forth information concerning the persons known by us to beneficially own 5% or more of our ordinary shares.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP Shares Owned Percent of Shares Name of Beneficial Owner Beneficially (1)(2) Owned Beneficially (3) Jean P. Cahuzac (4) ...... 180,269 Gregory L. Cauthen (4) ...... 22,017 Victor E. Grijalva ...... 56,451 Arthur Lindenauer ...... 19,121
10 Robert L. Long (4)(5) ...... 233,247 Paul B. Loyd, Jr...... 1,477,688 Martin B. McNamara...... 44,755 Roberto Monti ...... 14,000 Richard A. Pattarozzi...... 40,000 Jan Rask...... 0 Kristian Siem (6) ...... 24,841 Robert M. Sprague...... 0 Ian C. Strachan ...... 14,500 J. Michael Talbert (4)(7)...... 794,906 All directors and executive officers as a group (16 persons) (4) ...... 3,110,844 FMR Corp. (8)...... 21,239,142 6.6% ______(1) The business address of each director and executive officer is c/o Transocean Inc., 4 Greenway Plaza, Houston, Texas 77046. (2) Includes options exercisable within 60 days held by Messrs. Cahuzac (178,594), Cauthen (19,167), Grijalva (14,000), Lindenauer (14,000), Long (190,999), Loyd (1,412,688), McNamara (33,672), Monti (14,000), Pattarozzi (40,000), Siem (24,841), Strachan (14,000), Talbert (713,792) and all directors and executive officers as a group (2,846,511). Also includes rights to acquire ordinary shares under our deferred compensation plan held by Messrs. Grijalva (17,304) and McNamara (10,083), and all directors and executive officers as a group (27,387). (3) As of January 31, 2004, each listed individual and our directors and executive officers as a group beneficially owned less than 1.0% of the outstanding ordinary shares. (4) Includes: All directors and executive officers as a Mr. Cahuzac Mr. Cauthen Mr. Long Mr. Rask Mr. Talbert group Shares held by Trustee under 401(k) plan ...... 0 0 3,646 0 2,295 10,551 Shares held in Employee Stock Purchase Plan ...... 1,294 1,351 4,461 0 0 13,065
(5) Includes 34,322 shares held in a joint account with his wife. (6) Excludes 1,423,720 of our ordinary shares held by Siem Industries, Inc. Mr. Siem is the Chairman and Chief Executive Officer of Siem Industries, Inc. As a result, he may be deemed a beneficial owner of those ordinary shares. (7) Includes 78,536 shares held in a joint account with his wife. (8) Based on a Schedule 13G filed with the SEC on February 17, 2004. According to the filing, FMR Corp. has sole voting power over 838,286 shares, sole dispositive power over 21,239,142 shares and shared voting or dispositive power over no shares. Of the shares reported, 20,259,956 shares are beneficially owned by Fidelity Management & Research Company, an investment adviser and a wholly-owned subsidiary of FMR Corp., as a result of acting as investment advisor to various investment companies (collectively, the “Fidelity Funds”); with respect to these shares, FMR Corp., Mr. Edward C. Johnson 3d and each of the Fidelity Funds exercise sole investment power and the Fidelity Funds’ Boards of Trustees exercise sole voting power. Of the shares reported, 940,986 shares are beneficially owned by Fidelity Management Trust Company, a bank and a wholly- owned subsidiary of FMR Corp., as to which each of Mr. Johnson and FMR Corp., through its control of Fidelity Management Trust Company, has sole investment power with respect to 940,986 shares and sole voting power with respect to 796,586 shares. The remaining 38,200 shares reported are beneficially owned by Fidelity
11 International Limited, an investment adviser and an entity independent of FMR Corp., as to which shares Fidelity International Limited exercises sole investment and voting power. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
Section 16(a) Beneficial Ownership Reporting Compliance
We believe all Section 16(a) reporting requirements related to our directors and executive officers were timely fulfilled during 2003. This belief is based solely on a review of the reports required to be filed under Section 16(a) of the U.S. Securities Exchange Act of 1934 that have been furnished to us and written representations from those with filing obligations that all reports were timely filed.
COMPENSATION OF EXECUTIVE OFFICERS
Executive Compensation Committee Report
Introduction
The executive compensation committee’s primary responsibility is to ensure that our executive compensation program aligns the interests of management with those of our shareholders. The committee is composed solely of nonemployee directors.
Our report covers the following topics:
• the role of the executive compensation committee • our executive compensation guiding principles • the components of our executive compensation program • our stock ownership guidelines • the limitations on deductibility of non-performance based compensation
Role of the Executive Compensation Committee
Our executive compensation program is designed to attract and retain a highly qualified and motivated management team and appropriately reward individual executives for their contributions to the attainment of key strategic goals. We review the compensation principles for the executive officers each year. We also review and establish the individual compensation levels for the executive officers. We have considered the advice of independent, outside consultants in determining whether the amounts and types of compensation we pay are appropriate.
Following the 2003 reviews, the Committee established a leading-edge approach to the format of the long- term incentive program by adopting a new arrangement for the earning of equity awards by executives and key employees heavily weighted by performance goals. We believe that this fundamental departure from our historical and what we believe to be the more typical approach of awarding equity incentives subject only to time-vesting significantly improves our ability to align the interests of management with those of our shareholders and also exemplifies what we believe will be the future trend toward performance-based incentives.
Executive Compensation Guiding Principles
The goal of the compensation program is to attract, motivate and retain the talented individuals we need to be a leader in our highly competitive industry. The following are the guiding principles of our program:
Align the interests of executives with those of our shareholders.
We believe that executive compensation should be directly linked to results delivered to the shareholder. The cash bonus and long term incentive programs should ultimately deliver total compensation of executives that is predominantly determined by our success both in absolute terms and as measured against peer companies.
12 Performance-based compensation.
We believe that individual bonus and equity-based compensation should be tied to how well we perform and individual employee performance, so that when performance meets or exceeds goals, our employees are compensated at the levels set for such goals, and when performance does not meet goals, bonus and equity-based awards for our employees are reduced or eliminated accordingly.
Compensation should be set at competitive levels.
The Committee believes that executive compensation must be monitored to ensure that we maintain competitive compensation levels. We meet with outside consultants at least annually to review and compare the level of compensation we pay or award to key executives to the compensation practices of a peer group of companies. For 2003, the primary peer group of companies used to determine compensation (base salary, cash bonus incentives and long-term equity incentives) for key executives consisted of 15 publicly held companies that the Committee believes are generally of comparable financial size, business focus and scope; however, as described below, we use a narrower group of companies for comparisons based on return on capital.
Incentive compensation should be a greater part of total compensation for more senior positions.
The portion of an employee’s total compensation that varies based on our performance and individual performance should increase as the employee’s business responsibilities increase. For 2003, over 83% of Mr. Long’s target pay was subject to annual cash bonus program and long-term incentive performance goals.
Components of Our Executive Compensation Program
The three components of our compensation program are:
• base salary • cash bonus incentives • long-term equity incentives
Base Salary
We set base salaries for executive officers so that they approximate the size-adjusted median for salaries of comparable executives in our peer group. We adjust base salaries when warranted by an employee’s experience and individual performance and when our market surveys or other similar information show that base salaries within the peer group are being adjusted. In line with this approach, Mr. Long’s base salary was adjusted from $600,000 to $660,000 in July 2003.
Cash Bonus Incentives
We award annual cash bonus incentive opportunities under the Performance Award and Cash Bonus Plan. The amount of an executive’s bonus opportunity, which is expressed as a percentage of base salary, depends primarily upon that individual’s position and responsibilities and bonus opportunities provided to comparable positions within our peer group. At the beginning of each year, the Committee reviews and approves annual performance goals. Shortly after the end of the year, the Committee determines the appropriate bonus payout levels based on the degree to which these goals have been achieved. The annual incentive program is designed to pay total annual cash compensation, which is salary plus bonus, above the median of our peer group when we meet substantially all of the goals established for an executive’s bonus opportunity. Similarly, when the goals are not achieved, the program is intended to result in total annual cash compensation below the median of our peer group. The Committee also has the discretion to award performance-based cash bonuses under our Long-Term Incentive Plan.
13 The Committee determined that the payout for an executive’s 2003 bonus opportunity was to be based on the level of achievement of a company-wide financial goal, corporate goals and individual goals, as described below. The financial goal was weighted at 50%, the corporate goals at 35% and the individual goals at 15%. For 2003, bonus opportunities ranged from 30% to 90% of base pay. The actual percentage payment can range from 0% to 200% of the bonus opportunity, depending on the Committee’s evaluation of an individual’s performance against his or her goals. The Committee may use its discretion to adjust payments downward from these amounts or to make additional cash bonus awards beyond the bonus opportunity to recognize exceptional individual performance or to take account of other factors.
The financial goals included in the 2003 bonus opportunities under our Performance Award and Cash Bonus Plan for senior management was our 2003 earnings per share (“EPS”) as compared to our budgeted EPS, and a measure of cash flow return on capital (“CFROC”), as assessed and ranked to a group of companies within our peer group. Payout of the EPS goal was based on minimum, target and maximum levels of achievement. The corporate goals for all senior executives included in the 2003 bonus opportunities included operating excellence, technical leadership and annual goals relating to safety and customer focus programs.
The Committee met in December 2003 and February 2004 to review the EPS and CFROC performance and the attainment of the corporate goals and objectives for the year 2003. Based on this review, the Committee determined that Mr. Long would not receive a bonus for 2003 under our Performance Award Cash Bonus Plan or Long Term Incentive Plan primarily because EPS results did not meet expectations for the year and because of the number of safety-related incidents that occurred during the year.
Long–Term Incentives: Stock Options, Contingent Stock Options and Contingent Restricted Stock
The long-term equity incentive component of our executive compensation program is designed to align executive and shareholder interests by rewarding executives for the attainment of a total shareholder return (“TSR”) and a cash flow return on capital that ranks favorably within our peer group. In previous years, we principally granted time-vested stock options to our executives as long-term equity incentives and occasionally granted time- vested restricted stock awards when specific results were met. In an effort to further align executive and shareholder interests, we have made a fundamental change in our equity awards through the granting of contingent stock options and contingent restricted stock based on company performance.
The committee currently intends to administer the long-term equity incentive program through annual grants of these contingent stock options and contingent restricted shares to designated executive officers and other key employees. The committee may also make special awards to individual executives and other key employees during the year on a discretionary basis. The peer group of companies used to measure our relative TSR consists of 15 publicly traded companies with a focus on contract drilling and oilfield services. The peer group of companies used to measure our relative CFROC rank is a more narrowly defined group of 10 companies comprised primarily of contract drillers. In July 2003, the Committee made grants of contingent stock options, contingent restricted stock and time-vested stock options to executives and certain key employees, including Mr. Long, and contingent restricted stock grants to other key employees in order to further the goal of aligning the executives’ and key employees’ interests with those of our shareholders and to encourage management continuity. The committee intends to award only contingent awards as part of the annual 2004 grant.
Each executive officer is given a target grant opportunity based on the executive’s individual position and compensation survey data of our peer group. The executives may be granted a combination of contingent stock options, contingent restricted shares and time-vested stock options that in total combined value approximate the 75th percentile level each year, subject to the Committee’s discretion to grant more or fewer options or restricted shares. Contingent awards are based upon a two-year performance period at the end of which the number of contingent shares received and/or options retained is determined based on our performance relative to peer groups using TSR and CFROC rankings. In general terms, performance at the top of the relevant peer groups results in the executive retaining all of the contingent options and receiving all of the restricted shares. Conversely, performance within the approximate bottom quartile results in contingent options being forfeited and restricted stock not being received. Performance between these limits results in partial retention of the contingent options and partial receipt of the restricted stock in correlation to the peer rankings. One-third of the contingent options and restricted shares vest at the end of the performance period (year 2), with the remainder vesting in years 3 and 4.
14 Based upon the above criteria, in July 2003, we granted Mr. Long time-vested options to purchase 53,140 ordinary shares at an exercise price of $21.20 per share, which was the fair market value of the ordinary shares at the date of the grant. At the same time, we also granted Mr. Long 159,400 contingent options to purchase ordinary shares at an exercise price of $21.20 and 97,240 contingent restricted shares. Both the contingent option and contingent restricted share grants are subject to a two year performance period ending December 31, 2004, at which time the determination of how many of these options or shares to be retained by Mr. Long, if any, will be made on the basis of relative TSR and CFROC measures to peer groups.
Stock Ownership Guidelines
The Committee believes that it is important for our executives to build and maintain a significant minimum equity stake in our company and that these ownership requirements should be an integral part of our performance-based grant program. Our ownership policy only covers the restricted shares awarded under this program beginning with the 2003 grants. In order to sell any restricted shares granted under the program, our ownership policy requires executives to hold and maintain after the sale vested shares with a value equal to or greater than the following:
• our Chief Executive Officer — five times annual base salary; • an Executive or Senior Vice President — three times annual base salary; • a Vice President or a Region Manager — two times annual base salary.
Should the share price later decline whereby an executive falls below the required holdings, the executive is precluded from further sales of restricted shares granted under the program until such time as the executive again meets the ownership requirements. Ownership status by each executive shall be reviewed by the Committee on an annual basis. The Committee will consider the size of and/or eligibility for any future awards to any executive found to have knowingly violated the above requirements.
Limitations on Deductibility of Non-Performance Based Compensation
To the extent attributable to our U.S. subsidiaries and otherwise deductible, Section 162(m) of the U.S. Internal Revenue Code limits the tax deduction that our U.S. subsidiaries can take with respect to the compensation of designated executive officers, unless the compensation is “performance-based.” The Committee expects that all income recognized by executive officers upon the exercise of stock options granted under the Long-Term Incentive Plan will qualify as performance-based compensation.
Under the Long-Term Incentive Plan, the Committee has the discretion to award performance-based cash compensation that qualifies under Section 162(m) of the U.S. Internal Revenue Code based on the achievement of objective performance goals. All of our executive officers are eligible to receive this type of award. The Committee has determined, and may in the future determine, to award compensation that does not qualify under Section 162(m) as performance-based compensation.
Conclusion
The Committee believes that the executive compensation philosophy that we have adopted effectively serves our interests and those of our shareholders. It is the Committee’s intention that the pay delivered to executives be commensurate with our performance.
This report is issued as of February 11, 2004. The Committee membership has changed since that date.
RICHARD A. PATTAROZZI, CHAIRMAN ROBERTO L. MONTI
PAUL B. LOYD, JR.KRISTIAN SIEM
15 Executive Compensation
The table below shows the compensation during 2001, 2002 and 2003 of our Chief Executive Officer and our four most highly compensated executive officers other than our Chief Executive Officer who were serving as executive officers at the end of 2003 (the “named executive officers”).
SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation Awards Restricted Securities Name and Other Annual Stock Underlying All Other Principal Position Year Salary($) Bonus($)(1) Compensation($) Award($)(2) Options/SARs Compensation($)(5) J. Michael Talbert ...... 2003 475,000 0 0 0 0 1,887,880(6) Chairman 2002 851,042 735,000 0 0 200,000(3) 2,318,844(6) 2001 896,218 625,000 0 0 175,000(3) 86,550
Robert L. Long ...... 2003 627,000 0 0 2,061,488 212,540(4) 800,322(7) President and 2002 520,833 400,000 0 0 110,000(3) 968,380(7) Chief 2001 460,494 260,039 0 0 50,000(3) 46,938 Executive Officer
Jean P. Cahuzac...... 2003 401,875 0 42,097(9) 1,374,396 141,700(4) 63,744(8) Executive Vice 2002 395,000 281,768 45,486(9) 0 75,000(3) 57,547(8) President, Chief 2001 384,244 196,656 50,365(9) 0 50,000(3) 74,708(8) Operating Officer
Gregory L. Cauthen ..... 2003 309,167 73,118 0 1,030,744 106,270(4) 14,255 Senior Vice 2002 286,458 154,340 0 0 40,000(3) 13,002 President and 2001 176,791 53,270 0 0 30,000(3) 1,060 Chief Financial Officer
Jan Rask (9)...... 2003 530,000 0 0 0 0 0 President and 2002 242,917 194,103 0 0 0 0 Chief Executive Officer of TODCO
______(1) The amount shown as “Bonus” for a given year includes amounts earned with respect to that year but paid in the first quarter of the following year. (2) Represents the dollar value of an opportunity to be awarded shares of restricted stock based on the closing market price of our ordinary shares on the date the opportunity was granted (97,240 shares for Mr. Long, 64,830 shares for Mr. Cahuzac and 48,620 shares for Mr. Cauthen), assuming full vesting of the shares subject to the opportunity. The actual number of restricted shares that are awarded is subject to performance-based conditions. One-third of the shares that are awarded vest at the end of a two-year performance period, and the remainder vest after years three and four. For a discussion of our contingent, performance-based equity awards, see “—Executive Compensation Committee Report.” (3) Represents time-vested options to purchase our ordinary shares at fair market value on the date of the grants. (4) Represents time-vested options to purchase ordinary shares (53,140 for Mr. Long, 35,430 for Mr. Cahuzac and 26,570 for Mr. Cauthen) and contingent options to purchase ordinary shares (159,400 for Mr. Long, 106,270 for Mr. Cahuzac and 79,700 for Mr. Cauthen), in each case at the fair market value on the date of grant. The actual number of contingent options that vest is subject to performance-based conditions. For a discussion of our contingent, performance-based equity awards, see “—Executive Compensation Committee Report.” (5) With respect to 2003, the amounts shown as “All Other Compensation” include the following:
16 Mr. Cahuzac Mr. Cauthen Mr. Long Mr. Rask Mr. Talbert Matching contributions under the Savings Plan...... 9,000 9,000 9,000 0 9,000 Contributions under the Supplemental Benefit Plan ...... 10,307 5,255 22,024 0 20,152 Defined contribution international retirement benefit plan ...... 44,437 0 0 0 0
(6) In addition to the items listed in footnote (5), includes payments of $1,858,728 in 2003 and $2,272,943 in 2002 to Mr. Talbert in connection with the change of control provisions in his former employment agreement. See “—Employment Agreements.” (7) In addition to the items listed in footnote (5), includes payments of $769,298 in 2003 and $942,509 in 2002 to Mr. Long in connection with the change of control provisions in his former employment agreement. See “—Employment Agreements.” (8) For the years 2003, 2002 and 2001, includes payments to Mr. Cahuzac relating to school fees ($34,463, $30,192 and $31,876, respectively) and home country travel entitlement ($7,635, $14,172 and $7,610, respectively). (9) Mr. Rask began his employment on July 16, 2002 with TODCO, a publicly traded drilling company in which we own a majority interest. Options Granted
The table below contains information with respect to options to purchase our ordinary shares granted to the named executive officers in 2003.
OPTION/SAR GRANTS IN 2003
Potential Realizable Value at Assumed Annual Rates of Company Share Price Appreciation for Option Individual Grants Term (10 Years) % of Total Number of Options/SARs Securities Granted to Underlying Company Exercise Options/SARs Employees in Price Expiration Name Granted 2003 ($ /share) Date(1) 5%(2) 10%(2) J. Michael Talbert...... 0 0 - - $ 0 $ 0 Robert L. Long ...... 53,140(3) 3 $21.20 7/10/13 $ 708,493 $ 1,795,459 159,400(4) 10 $21.20 7/10/13 $ 2,125,211 $ 5,385,702 Jean P. Cahuzac ...... 35,430(3) 2 $21.20 7/10/13 $ 472,373 $ 1,197,085 106,270(4) 7 $21.20 7/10/13 $ 1,416,852 $ 3,590,581 Gregory L. Cauthen...... 26,570(3) 2 $21.20 7/10/13 $ 354,246 $ 897,730 79,700(4) 5 $21.20 7/10/13 $ 1,062,606 $ 2,692,851 Jan Rask...... 0 0 - - $ 0 $ 0 ______(1) The options are subject to termination prior to their expiration date in some cases where employment is terminated.
17 (2) These columns show the gains the named executives and all of our shareholders could realize if our shares appreciate at a 5% or 10% rate. These growth rates are arbitrary assumptions specified by the Securities and Exchange Commission, not our predictions. (3) Represents time-vested options to purchase ordinary shares. (4) Represents contingent, performance-based options to purchase ordinary shares. The actual number of contingent options that vest is subject to performance-based conditions. For a discussion of our contingent, performance-based equity awards, see “—Executive Compensation Committee Report.” Aggregate Option Exercises
The following table shows information concerning options to purchase our ordinary shares the named executive officers exercised during 2003, and unexercised options they held as of December 31, 2003:
AGGREGATED OPTION EXERCISES IN 2003 AND 2003 YEAR-END OPTION VALUE
Number of Securities Underlying Value of Unexercised, Unexercised Options In-the-Money Options at Fiscal Year End at Fiscal Year End Shares Acquired on Value Name Exercise Realized Exercisable Unexercisable Exercisable(1) Unexercisable
J. Michael Talbert...... 0 $0.00 713,792 191,668 $1,129,192 $ 0 Robert L. Long ...... 0 $0.00 190,999 302,541(2) $ 97,784 $ 770,241 Jean P. Cahuzac...... 0 $0.00 178,594 208,368(2) $ 43,248 $ 484,679 Gregory L. Cauthen...... 0 $0.00 16,667 127,103(2) $ 0 $ 298,619 Jan Rask...... 0 $0.00 0 0 0 0 ______(1) The value of each unexercised in-the-money option is equal to the difference between $24.00, which was the closing price of our ordinary shares on December 31, 2003, and the exercise price of the option.
(2) Includes contingent, performance-based options to purchase ordinary shares granted in 2003 (159,400 for Mr. Long, 106,270 for Mr. Cahuzac and 79,700 for Mr. Cauthen). The actual number of contingent options that vest is subject to performance-based conditions. For a discussion of our contingent, performance-based equity awards, see “—Executive Compensation Committee Report.”
Defined Benefit Plans
We maintain a U.S. Retirement Plan for our qualifying employees and officers and those of participating subsidiaries. In general, we base annual retirement benefits on average covered compensation for the highest five consecutive years of the final ten years of employment and years of service. We include salaries and bonuses as covered compensation under the U.S. Retirement Plan. We do not include (1) amounts relating to the grant or vesting of restricted shares, the exercise of options and SARs, and receipt of tax-offset supplemental payments with respect to options, SARs or restricted shares, or (2) employer contributions under our Savings Plan or our Supplemental Benefit Plan.
The maximum annual retirement benefit under our U.S. Retirement Plan is generally 60% of the participant’s average covered compensation minus 19.5% of his or her covered social security earnings. The eligible survivors of a deceased U.S. Retirement Plan participant are entitled to a survivor’s benefit under the plan.
Eligible participants in our U.S. Retirement Plan and their eligible survivors are entitled to receive retirement and survivors benefits that would have been payable under the U.S. Retirement Plan but for the fact that benefits payable under funded pension plans are limited by U.S. tax laws. As a general rule, during 2003, the U.S. tax laws limited annual benefits under tax-qualified retirement plans to $160,000, subject to reduction in some cases, and required those plans to disregard any portion of the participant’s 2003 compensation in excess of $200,000. A
18 participant may choose to have these benefits paid either as a life annuity or in a cash lump sum upon termination of employment.
Mr. Cahuzac is a non-U.S. citizen and participated in a defined contribution international retirement plan. Effective January 1, 2004, he began participation in our U.S. Retirement Plan. Mr. Rask does not participate in our U.S. Retirement Plan or our Supplemental Benefit Plan.
The following table shows the estimated pension benefits payable under the pension plan and the supplemental benefit plan at age 65 based on compensation that is covered by the pension plan and the supplemental benefit plan, years of service with us and the payment in the form of a lifetime annuity:
Years of Service Final Average Earnings 10 15 20 25 30 35
$ 100,000 $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000 $ 300,000 $ 60,000 $ 90,000 $ 120,000 $ 150,000 $ 180,000 $ 180,000 $ 500,000 $ 100,000 $ 150,000 $ 200,000 $ 250,000 $ 300,000 $ 300,000 $ 700,000 $ 140,000 $ 210,000 $ 280,000 $ 350,000 $ 420,000 $ 420,000 $ 900,000 $ 180,000 $ 270,000 $ 360,000 $ 450,000 $ 540,000 $ 540,000 $ 1,100,000 $ 220,000 $ 330,000 $ 440,000 $ 550,000 $ 660,000 $ 660,000 $ 1,300,000 $ 260,000 $ 390,000 $ 520,000 $ 650,000 $ 780,000 $ 780,000 $ 1,500,000 $ 300,000 $ 450,000 $ 600,000 $ 750,000 $ 900,000 $ 900,000 $ 1,700,000 $ 340,000 $ 510,000 $ 680,000 $ 850,000 $ 1,020,000 $ 1,020,000 $ 1,900,000 $ 380,000 $ 570,000 $ 760,000 $ 950,000 $ 1,140,000 $ 1,140,000
Annual benefits are shown before deduction of 6.5% of average covered social security earnings after 10 years of service, 9.75% after 15 years of service, 13.0% after 20 years of service, 16.25% after 25 years of service, and 19.25% after 30 or more years of service.
The Final Average Earnings as of December 31, 2003 for Messrs. Talbert, Long and Cauthen were $1,497,602, $724,899, and $348,953 respectively. Messrs. Talbert, Long and Cauthen have approximately 9.33, 28.50, and 2.58 years, respectively, of credited service under the pension plan and the supplemental benefit plan.
Performance Graph
The graph below compares the cumulative total shareholder return of (1) our ordinary shares, (2) the Standard & Poor’s 500 Stock Index and (3) the Simmons & Company International Upstream Index over our last five fiscal years. The graph assumes that $100 was invested in our ordinary shares and each of the other two indices on December 31, 1997, and that all dividends were reinvested on the date of payment.
19 CUMULATIVE TOTAL SHAREHOLDER RETURN
Indexed Total Shareholder Return December 31, 1999—December 31, 2003
$190 $170 $150 $130 $110 $90 $70 $50 $30 31-Dec-99 31-Dec-00 31-Dec-01 31-Dec-02 31-Dec-03
Company S&P 500 Simmons Upstream
December 31, 1999 2000 2001 2002 2003 Transocean 100.00 136.84 101.25 69.94 72.34 S&P 500 100.00 90.90 80.12 62.44 80.24 Simmons Upstream Index 100.00 169.81 126.92 121.69 140.14
Change of Control Provisions of Benefit Plans
Some of our benefit plans provide for the acceleration of benefits in the event of a change of control of our company. A change of control generally includes acquisitions of beneficial ownership of 20% or more of our ordinary shares, changes in board composition and certain merger and sale transactions.
Upon the occurrence of a change of control, all outstanding restricted shares actually granted under the Long-Term Incentive Plan will immediately vest and all options and SARs granted under the Long-Term Incentive Plan to outside directors or held by then-current employees will become immediately exercisable. Half of the shares subject to performance-based opportunities to be awarded shares of restricted stock that were granted to certain employees in 2003 but have not yet been determined will immediately vest upon the occurrence of a change of control. In addition, the executive compensation committee may provide that if a SAR is exercised within 60 days of the occurrence of a change of control, the holder will receive a payment equal to the excess over the amount otherwise due of the highest price per ordinary share paid during the 60-day period prior to exercise of the SAR. The executive compensation committee also may provide that the holder is entitled to a supplemental payment on that excess. Those payments are in addition to the amount otherwise due on exercise. Also, upon the occurrence of a change of control, the participant will become vested in 100% of the maximum performance award he could have earned under our Performance Award and Cash Bonus Plan for the proportionate part of the performance period prior to the change of control and will retain the right to earn out any additional portion of his award if he remains in our employ. If the amendment of our Long-Term Incentive Plan is approved by shareholders, it will provide for minimum vesting restrictions for restricted share and deferred unit awards.
The Sedco Forex merger constituted a change of control under our Long-Term Incentive Plan and Performance Award and Cash Bonus Plan.
20 Consulting Agreements with Directors
As part of the Sedco Forex merger and as a condition to his appointment as Chairman of the Board, we entered into a consulting agreement with Victor E. Grijalva. The consulting agreement terminated in July 2003 and contained the following material terms:
• Mr. Grijalva remained as a member of our board and provided consulting services to us, as an independent contractor, with regard to long-range planning, strategic direction and integration and rationalization matters;
• we paid Mr. Grijalva $400,000 per year;
• we were to indemnify Mr. Grijalva in connection with the services he provided to the fullest extent available under our articles of association; and
• Mr. Grijalva was entitled to the non-cash compensation and benefits we provided to non-employee directors.
Mr. Grijalva received a pro rata portion of the normal director retainer for part of 2003 after the expiration of his consulting agreement.
At the time of the R&B Falcon merger, R&B Falcon entered into a consulting agreement with Paul B. Loyd, Jr. The consulting agreement, which has now expired, contained the following material terms:
• the term of the consulting agreement was for a period of two years following the date of Mr. Loyd’s termination of employment from R&B Falcon, which occurred on January 31, 2001, and he could terminate it at any time on 30 days’ advance written notice;
• Mr. Loyd would provide consulting services with regard to strategies, policies, special projects, incentives, goals and other matters related to the development and growth of R&B Falcon for a minimum of 30 hours per month;
• Mr. Loyd agreed not to perform substantially similar services during the term of the consulting agreement for any other company that provides offshore contract drilling services;
• we would pay Mr. Loyd $360,000 per year and he would waive all director’s fees or other remuneration that he would otherwise receive for being a member of our board of directors; and
• Mr. Loyd would be entitled to reimbursement of expenses incurred in providing consulting services.
Mr. Grijalva and Mr. Loyd are now entitled to the same compensation and benefits as other non-employee members of the board in accordance with our policies.
Employment Agreements
During September and October 2000, we entered into new agreements with some of our executive officers, including Messrs. Talbert and Long. These agreements replaced agreements entered into prior to the Sedco Forex merger. The prior agreements provided that the occurrence of a change in control triggered employment agreements which contained provisions that allowed executives to leave for any reason during a specified period following the change of control and receive the payments defined in the employment agreements, which generally guaranteed a minimum salary and bonus for a period of three years. The Sedco Forex merger triggered these provisions, and as a result, the executives could have left for any reason during January 2001 and received the payments under the employment agreements. In order to induce the executives to remove such right and remain with our company, we offered the executives either (a) a cash payment equivalent to the amount otherwise due under the employment agreement as if the executive left in January 2001 to be vested and paid, with interest, over a three year period in
21 equal annual installments commencing January 2002, in exchange for termination of the employment agreement (such amounts would become payable if the executive remained employed, and would become payable in a lump sum if the executive’s termination occurred due to death, disability or termination without cause, or due to certain reductions in authority or base salary), or (b) an extension of the existing employment agreement for three years beyond the current one month trigger period with a first term of 18 months during which the employee commits to remain with our company, followed by an additional term of 18 months (commencing July 1, 2002) during which the employee can self trigger the payment rights to predetermined amounts, with interest, under the employment agreement by terminating his or her employment. Messrs. Talbert and Long entered into agreements described in clause (b) of the foregoing sentence. None of the new agreements contain change of control provisions. The agreements with Messrs. Talbert and Long provide that in the event the payments called for under the agreement would subject the executive to an excise tax under Section 4999 of the U.S. Internal Revenue Code, the executive will be entitled to receive an additional “gross-up” payment in some circumstances.
In May 2002, Mr. Long entered into an agreement revoking his employment agreement described above, which had provided him a right to leave for any reason and receive his change of control payments. The new agreement provides for a cash payment of $2,142,756 to be vested and paid, with interest, over a three year period in equal annual installments beginning June 1, 2002. The amount of this payment is approximately equal to the amount Mr. Long would have been entitled to receive under his employment agreement if his employment had been terminated in January 2001.
In October 2002, in connection with the change in his duties with our company, Mr. Talbert entered into an agreement revoking his employment agreement described above, which had provided him a right to leave for any reason and receive his change of control payments. The new agreement provides for the reduction in his annual salary to $475,000 and a cash payment of $4,877,593 to be vested and paid, with interest, over a three year period in equal annual installments beginning October 2002. The amount of this payment is approximately equal to the amount Mr. Talbert would have been entitled to receive under his prior employment agreement if his employment had been terminated in January 2001. The agreement also provides that Mr. Talbert will tender his resignation as Chairman of the Board for action by the board of directors on the earliest to occur of any regularly scheduled meeting of the board of directors in October 2004 and October 16, 2004.
The charter of the executive compensation committee has now been changed to prohibit “single-trigger” change of control employment agreements that are triggered solely by a change of control.
Neither Mr. Cahuzac nor Mr. Cauthen is a party to an employment agreement with us.
TODCO entered into an employment agreement with Mr. Rask effective as of July 16, 2002, as amended on December 12, 2003, to serve as Chief Executive Officer and President of TODCO in exchange for specified compensation and benefits. The initial term of his employment agreement ends on January 16, 2007. Afterwards, the agreement automatically renews for an additional one-year term on each anniversary of the effective date of the agreement unless either party gives at least a six-month advance written notice of nonrenewal. Mr. Rask’s employment agreement calls for a minimum base salary of $530,000 per year, which will be reviewed at least annually and may be increased afterwards. The agreement also affords Mr. Rask the opportunity to receive an annual discretionary bonus that is tied to his achievement of specified performance objectives established by TODCO’s board of directors. Mr. Rask’s annual discretionary bonus is calculated by multiplying his percentage of attained objectives by his annual target bonus, which is a specified percentage of his base salary. For each year of the initial term of his employment agreement, Mr. Rask’s annual target bonus will be no less than 70% of his base salary. Under the agreement, Mr. Rask also is eligible to receive stock option awards at the discretion of TODCO’s board of directors and is entitled to participate in TODCO’s applicable incentive, savings, retirement and welfare plans and to receive specified perquisites.
Under the employment agreement, Mr. Rask received a nonqualified stock option to purchase 1,200,000 shares of TODCO Class A common stock immediately after the closing of the initial public offering of TODCO. The exercise price of the shares subject to the option, $12.00, is equal to the price to the public for the shares sold in the offering. The option has a ten-year term (except in the case of Mr. Rask’s termination) and one-half of the shares subject to the option became exercisable on February 10, 2004, the closing date of the offering. The remaining shares subject to the option become exercisable the first two anniversaries of the closing date of the offering in equal
22 increments. In addition to the option, Mr. Rask received 156,496 restricted shares of TODCO Class A common stock. The restricted shares vest on July 16, 2005. The option and restricted shares are subject to the other terms and conditions, consistent with the foregoing, of TODCO’s incentive plan and the applicable award agreement.
Under the employment agreement, if Mr. Rask voluntarily terminates his employment (other than in connection with a “change in control” as defined in the agreement) with 90 days’ advance written notice or if his employment is terminated due to death or disability, he will receive his unpaid base salary through his termination date, any bonus payable for the relevant year and any other benefits to which he has a vested right. Additionally, in the event of a termination due to death or disability, the option and restricted shares awarded to him, will fully vest and the option will remain exercisable for its full term.
Upon termination of his employment by TODCO (except under limited circumstances defined as for “cause” in the agreement), Mr. Rask will receive (1) his unpaid base salary for his remaining employment term (which includes the initial term and any renewals), (2) any bonus payable for the relevant year, (3) full vesting of the option awarded to him and exercisability through its full term, (4) full vesting of restricted shares awarded to him and (5) any other benefits to which he has a vested right.
In the event of a termination of his employment by TODCO (except under limited circumstances defined as for “cause” in the agreement) or by Mr. Rask for specified reasons, such as his removal from the position of Chief Executive Officer and President of TODCO, or the assignment to him of duties materially inconsistent with his position with TODCO (for “good reason”), within the 18-month period immediately following a “change in control” as defined in the agreement (a “change in control termination”), Mr. Rask will be entitled to receive (1) three times his annual compensation for the year of termination (which is the sum of his base salary and his annual target bonus, or, if greater, the highest bonus paid to him under the agreement during the most recent 36-month period), (2) any bonus payable for the relevant year, (3) continuation of specified welfare benefits for three years, (4) full vesting of the option awarded to him, and exercisability through its full term, and (5) full vesting of restricted shares awarded to him.
The employment agreement also provides for covenants limiting competition with TODCO, or any of its affiliates, and limiting solicitation for employment of any of TODCO’s employees, or any employees of its affiliates, for 18 months following a change in control termination or for one year following any other termination of employment and a covenant to keep specified nonpublic information relating to TODCO, or any of its affiliates, confidential. With respect to any payment or distribution to Mr. Rask the agreement provides for a tax gross-up payment designed to keep him whole with respect to any taxes imposed by Section 4999 of the Internal Revenue Code of 1986, as amended.
Compensation Committee Interlocks and Insider Participation
The members of the executive compensation committee of the board of directors during the last completed fiscal year were Mr. Kuehn, Chairman until his resignation from the board in March 2003, Alain Roger, who retired in May 2003, Mr. Pattarozzi, Chairman subsequent to Mr. Kuehn, and Messrs. Loyd, Monti and Siem. There are no matters relating to interlocks or insider participation that we are required to report.
CERTAIN TRANSACTIONS
We own a 50 percent interest in an unconsolidated joint venture company, Overseas Drilling Limited (“ODL”), which owns the drillship Joides Resolution. DSND Inc. owns the other 50 percent interest in ODL. Our director, Kristian Siem, is the chairman of DSND and is also a director and officer of ODL. We provide operational and management services to ODL, and we earned $1.2 million for these services in 2003. ODL also reimburses us for costs which we incur in connection with these services, and we were reimbursed $5.9 million for these services in 2003. ODL also distributed dividends of approximately $5.3 million to us in 2003. ODL loaned $1 million, interest-free, to each of DSND and us in March 2003, and these loans were repaid in September 2003. Mr. Siem is also chairman and chief executive officer of Siem Industries, Inc., which owns more than a 50 percent interest in DSND.
23 PROPOSAL TO AMEND OUR LONG-TERM INCENTIVE PLAN
Description of the Proposal
Consistent with the board’s increased emphasis on performance-based equity awards and its desire to compensate directors with deferred units that must be held until they leave the board, our board of directors has unanimously adopted a resolution to submit to a vote of our shareholders a proposal to amend our Long-Term Incentive Plan to:
• provide for awards of deferred units, which are units equal to one ordinary share each and are used to measure the benefits payable to the holder of the award,
• provide that any award may be designated as a performance award,
• provide for additional business criteria that may be used to establish goals for performance awards,
• replace automatic awards to outside directors with discretionary awards that are determined by our board,
• provide that outside directors are eligible for any type of award except for cash awards,
• restate the performance criteria specified in the plan for certain types of awards,
• allow net share counting in determining the number of shares available for issuance under the plan,
• provide for minimum vesting restrictions for restricted share and deferred unit awards,
• modify provisions relating to the amendment of the plan, and
• provide that the plan has a 10-year term.
No awards may be granted under the amended and restated incentive plan after the tenth anniversary of the date on which our shareholders approve this proposal. The board believes that the amendment is necessary to change the nature of the awards to our directors and to allow flexibility in the types of awards that we grant under the plan.
Because as of December 31, 2003 we had only 6,597,903 authorized shares remaining under the plan that can be issued to employees (assuming all outstanding awards vest and are exercised, including all contingent, performance-based awards), including only 1,170,935 shares that can be issued as restricted shares, the proposal would also increase the number of ordinary shares reserved for issuance to employees under the plan from 18,900,000 to 22,900,000 and the number of restricted shares or deferred units that may be issued to employees under the plan from 2,000,000 to 6,000,000. The total number of shares authorized under the plan for issuance to employees and directors would be 23,500,000, of which 10,803,384 would remain available for issuance.
If the proposal is approved by shareholders, the board intends to grant deferred units following the annual meeting to directors equal in value to $62,000 based upon the average price of our ordinary shares for the 10 trading days prior to the annual meeting. This amount is intended to represent approximately half of a director’s total annual compensation. This grant would be in lieu of the current annual grant of stock options/stock appreciation rights to our directors. The board may grant directors joining our board after the annual meeting an award but it has not yet made a determination.
Our board of directors unanimously recommends a vote “FOR” the proposal to approve the amendment to our long-term incentive plan.
24 Principal Provisions of the Proposed Long-Term Incentive Plan
The following summary of the proposed amended and restated long-term incentive plan is qualified by reference to the full text of the proposed amended and restated plan, which is attached as Appendix B to this proxy statement.
Our officers are eligible to participate in the incentive plan, as are employees of our company and our subsidiaries (other than TODCO) and of partnerships or joint ventures in which we and our subsidiaries have a significant ownership interest, as determined by the executive compensation committee. Our outside directors are also eligible to participate in the plan. Approximately 388 current employees and all of our current outside directors have received awards under the plan. All of our officers, employees and outside directors are eligible to receive awards under the plan at present.
With respect to awards to employees, the plan is administered by the executive compensation committee of our board of directors. We believe that all of the members of this committee are currently “non-employee directors” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and “outside directors” within the meaning of Section 162(m) of the U.S. Internal Revenue Code (the “Code”). The committee will administer the plan and will have the authority to interpret and amend the plan, adopt administrative regulations for the operation of the plan and determine and amend the terms of awards to employees under the plan. It is intended that the grant of awards under the amended and restated incentive plan, after approval by shareholders, will satisfy the requirements of Section 162(m) of the Code, as applicable to limitations on deductions of compensation expenses in excess of $1 million for certain executive officers.
With respect to awards to eligible outside directors, the plan is administered and interpreted by our board of directors. The board has the authority to designate the directors to receive awards under the plan and the type and amount of awards to be granted and the authority to amend the terms of awards to outside directors.
Under the plan, options to purchase ordinary shares, share appreciation rights in tandem with options, freestanding share appreciation rights, restricted shares, deferred units, cash awards and performance awards may be granted to employees at the discretion of the committee. With the exception of cash awards, these same awards may be granted to outside directors at the discretion of our board of directors. The committee (or the board, with respect to outside directors) may provide for a supplemental cash payment upon the exercise of an option or share appreciation right or the vesting of a restricted share or deferred unit award to cover the participant’s tax burden associated with the exercise or vesting.
The aggregate number of ordinary shares that may be issued under the plan with respect to options and share appreciation rights (including those designated as performance awards) granted to employees may not exceed 22,900,000 shares. Of such 22,900,000 shares, the aggregate number of ordinary shares that may be issued under the plan with respect to restricted share and deferred units awards (including those designated as performance awards) to employees may not exceed 6,000,000 shares. All shares available for awards under the plan may be issued with respect to incentive stock options. The aggregate number of ordinary shares that may be issued under the plan with respect to awards to outside directors may not exceed 600,000 shares. The shares issued under the plan may be ordinary shares held in treasury or authorized but unissued ordinary shares. As of December 31, 2003, 205,481 shares remained available for award to directors.
Cash tax-offset supplemental payments will not count against the limits above. Lapsed, forfeited or canceled awards, including options canceled upon the exercise of tandem share appreciation rights, will not count against these limits and can be regranted under the plan. If the exercise price of an option is paid in ordinary shares or if ordinary shares are withheld from payment of an award to satisfy tax obligations with respect to the award, those shares will also not count against the above limits. If the exercise price of an option is satisfied by a cash payment to our company by the participant or by or for the account of the participant, the number of ordinary shares equal to the cash payment to our company divided by the fair market value of the shares on the payment date will be added to the number of shares available for future awards (other than incentive stock options) under the incentive plan. Ordinary shares that are delivered under the plan as an award or in settlement of an award issued or made (1) upon the assumption, substitution, conversion or replacement of outstanding awards under a plan or arrangement of an entity acquired in a merger or other acquisition or (2) as a post-transaction grant under such plan or arrangement
25 of an acquired entity will not count against the limits above (to the extent that the exemption for transactions in connection with mergers or acquisitions from the shareholder approval requirements of the New York Stock Exchange for equity compensation plans applies).
No participant may be granted options, share appreciation rights, restricted shares or deferred units, or any combination of the foregoing, with respect to more than 600,000 ordinary shares in any fiscal year. No participant may be granted a supplemental payment in any fiscal year with respect to more than the number of ordinary shares covered by or relating to options, freestanding share appreciation rights, restricted shares or deferred units granted to such participant in any such fiscal year. No employee may receive a payment for cash awards under the plan during any calendar year in an amount that exceeds $2 million.
The committee (or the board, with respect to outside directors) determines, in connection with each option awarded to a participant, the exercise price, whether that price is payable in cash, ordinary shares or by cashless exercise, the terms and conditions of exercise, restrictions on transfer of the option, and other provisions not inconsistent with the plan. With respect to options awarded to employees, the committee also determines whether the option will qualify as an incentive stock option under the Code, or a non-qualified option. The committee (or the board, with respect to outside directors) is also authorized to grant share appreciation rights to plan participants, either as freestanding awards or in tandem with an option. Every share appreciation right entitles the participant, upon exercise of the share appreciation right, to receive in cash or ordinary shares a value equal to the excess of the market value of a specified number of ordinary shares at the time of exercise, over the exercise price established by the committee (or the board, with respect to outside directors). The plan requires that the exercise price of options and share appreciation rights be at least equal to the fair market value of our ordinary shares on the date of grant. The term of options and share appreciation rights under the plan may not exceed 10 years, except that the committee (or the board, with respect to outside directors) may extend the term for up to one year following the death of the participant.
The committee (or the board, with respect to outside directors) is authorized to grant participants awards of restricted shares or deferred units. The committee (or the board, with respect to outside directors) will determine the nature, extent and duration of any restrictions on restricted shares and the schedule and conditions for vesting of such shares. The vesting of restricted shares may be conditioned on the completion of a specified period of employment or service, the attainment of specified performance goals, or such other criteria as determined by the committee (or the board, with respect to outside directors) in its discretion. A deferred unit is a unit that is equal to one ordinary share, which is used to measure the benefits payable to a participant under a deferred unit award. The committee (or the board, with respect to outside directors) will determine the number of units awarded, the price (if any) to be paid by the participant and the date or dates upon which the units will vest. As with restricted shares, the vesting of deferred units may be conditioned on the completion of a specified period of employment or service, the attainment of specified performance goals, or such other criteria as determined by the committee (or the board, with respect to outside directors) in its discretion. Notwithstanding the foregoing, any restricted share or deferred unit award that is designated as a performance award may not vest earlier than the first anniversary of the initial date of the award (except that the committee (or the board with respect to outside directors) may provide for earlier vesting upon a termination of employment or service due to death, disability or retirement). In addition, any restricted share or deferred unit award that is not designated as a performance award may not vest earlier than one-third on each of the first three anniversaries of the date of grant of such award (except that the committee (or the board with respect to outside directors) may provide for earlier vesting upon a termination of employment or service due to death, disability or retirement and such restriction does not apply to an award that is granted in lieu of salary or bonus). The committee (or the board, with respect to outside directors) determines the other terms, conditions, restrictions and contingencies applicable to awards of restricted shares or deferred units.
The committee may also provide for cash awards to employees based on the achievement of one or more objective performance goals preestablished by the committee. Outside directors are not entitled to receive cash awards.
Any award granted under the plan may be designated as “qualified performance-based compensation” under Section 162(m) of the Code. If so designated, such performance award will be contingent upon our performance during the performance period, as measured by targets established by the committee, based on any one or more of:
26 • increased revenue;
• net income measures (including, but not limited to, income after capital costs and income before or after taxes);
• ordinary share price measures (including, but not limited to, growth measures and total shareholder return);
• price per ordinary share;
• market share;
• earnings per share (actual or targeted growth);
• earnings before interest, taxes, depreciation and amortization (“EBITDA”);
• economic value added (or an equivalent metric);
• market value added;
• debt to equity ratio;
• cash flow measures (including, but not limited to, cash flow return on tangible capital, cash flow return on capital, cash flow value added, net cash flow and net cash flow before financing activities);
• return measures (including, but not limited to, return on equity, return on average assets, return on capital, risk-adjusted return on capital, return on investors’ capital and return on average equity);
• operating measures (including operating income, funds from operations, cash from operations, after-tax operating income, sales volumes, production volumes and production efficiency);
• expense measures (including, but not limited to, overhead costs and general and administrative expense);
• margins;
• shareholder value;
• total shareholder return;
• proceeds from dispositions;
• total market value; and
• corporate values measures (including ethics compliance, environmental and safety).
Such performance measures may apply to the employee, to one or more business units or divisions of our company or the applicable sector, or to our company as a whole. Goals may also be based on performance relative to a peer group of companies. If the committee intends for the performance award to be granted and administered in a manner that preserves the deductibility of the compensation resulting from such award in accordance with Section 162(m) of the Code with respect to our U.S. affiliates, the performance goals must be established (1) no later than 90 days after the commencement of the period of service to which the performance goals relate and (2) prior to the completion of 25% of such period of service. The committee may modify or waive the performance goals or
27 conditions to the granting or vesting of a performance award unless the performance award is intended to qualify as performance-based compensation under Section 162(m) of the Code. Section 162(m) of the Code generally disallows deductions for U.S. federal tax purposes for compensation in excess of $1 million for some executive officers unless they meet the requirements for being performance-based.
We have not granted any incentive options to date under the plan but could determine to do so in the future.
The number and kind of shares covered by the plan and by outstanding awards under the plan and the exercise price of outstanding awards are subject to adjustment in the event of any:
• reorganization;
• recapitalization;
• stock dividend;
• stock split;
• merger;
• rights offer;
• liquidation;
• dissolution;
• spin-off
• consolidation;
• sale of assets;
• payment of an extraordinary cash dividend; or
• any other change in or affecting our corporate structure or capitalization.
Upon the occurrence of a change of control, following the grant of an award, the plan provides, with respect to awards other than performance-based awards, that (1) all outstanding restricted shares and deferred units will immediately vest and (2) all options and share appreciation rights held by a participant who is an employee of our company or subsidiary or an outside director of our company at the time of such change in control will become immediately exercisable and will remain exercisable for the remainder of their term.
The board has the authority to amend, alter, discontinue the plan at any time, provided that such amendment, alteration or discontinuance does not impair the rights of any participant under any outstanding award without such participant’s consent. No amendment to the plan will be made without shareholder approval if such approval is required by Rule 16b-3 of the Securities Exchange Act of 1934, Section 162(m) of the Code, or any other applicable law, agreement or stock exchange requirement. In addition, shareholder approval of an amendment to the plan is required under the plan if such amendment would:
• expand the classes of persons to whom awards may be made under the plan;
• increase the number of ordinary shares reserved for awards;
28 • increase the number of ordinary shares that may be granted pursuant to awards to any one participant;
• increase the number of ordinary shares available for restricted share or deferred unit awards;
• permit unrestricted ordinary shares to be granted other than in lieu of cash payments under other incentive plans and programs of our company and subsidiaries;
• allow the creation of additional types of awards;
• permit shortening the minimum restriction periods with respect to restricted share awards, the minimum vesting periods with respect to deferred unit awards or removing or waiving performance objectives (except to the extent permitted under other plan provisions); or
• change any of these amendment provisions.
The committee (or the board, with respect to outside directors) has the authority to amend any award, prospectively or retroactively (in accordance with plan terms), except that no amendment may be made that would impair the rights of any participant under any outstanding award without such participant’s consent or that would cause a performance award intended to qualify for a section 162(m) exemption to cease to qualify for such exemption. The committee (or the board, with respect to outside directors) may also cancel any award with the participant’s consent and grant a new award to such participant, provided that the exercise or base price of the new award is not less than (1) the original exercise price or base price of the option or share appreciation right that is relinquished in connection with the grant of such new award or (2) the then current market price of the ordinary shares on the date of grant of any outstanding option or share appreciation right that is relinquished in connection with the grant of such new award.
The amended and restated incentive plan will be effective as of January 1, 2004, subject to shareholder approval. Our board of directors may at any time amend, suspend or terminate the plan, but in doing so cannot adversely affect any outstanding awards without the participant’s written consent. Unless terminated earlier by the board, no awards may be made under the plan after the tenth anniversary of the date on which the amended and restated incentive plan is approved by our shareholders.
The amount and type of awards to be granted in the future under the plan to the named officers, to all executive officers as a group and to all other employees, or that would have been received by those individuals last year had the plan as amended and restated then been in effect, are not currently determinable.
U.S. Federal Income Tax Consequences
The following is a summary of the general rules of present U.S. federal income tax law relating to the tax treatment of incentive stock options, non-qualified stock options, share appreciation rights, restricted shares awards, deferred unit awards and cash awards issued under the plan as they apply to U.S. affiliates or participants. The discussion is general in nature and does not take into account a number of considerations that may apply based on the circumstances of a particular participant under the plan, including the possibility that a participant may not be subject to U.S. federal income taxation. When the terms “we”, “our”, “us” or “our company” is used in this section, the term is understood to mean a U.S. operating subsidiary of Transocean.
Non-Qualified Stock Options; Share Appreciation Rights; Incentive Stock Options. Participants will not realize taxable income upon the grant of a non-qualified stock option or a share appreciation right. Upon the exercise of a non-qualified stock option or a share appreciation right, the participant will recognize ordinary income (subject to withholding) in an amount equal to the excess of (1) the fair market value on the date of exercise of the ordinary shares received over (2) the exercise price (if any) he or she paid for the shares. The participant will generally have a tax basis in any ordinary shares received pursuant to the exercise of a share appreciation right, or pursuant to the cash exercise of a non-qualified stock option, that equals the fair market value of such shares on the date of exercise. Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, our U.S.
29 subsidiaries will be entitled to a deduction, to the extent attributable to them, for U.S. federal income tax purposes that corresponds as to timing and amount with the compensation income recognized by the participant under the foregoing rules. The disposition of the ordinary shares acquired upon exercise of a non-qualified stock option will ordinarily result in capital gain or loss.
Employees will not have taxable income upon the grant of an incentive stock option. Upon the exercise of an incentive stock option, the employee will not have taxable income, although the excess of the fair market value of the ordinary shares received upon exercise of the incentive stock option (“ISO Shares”) over the exercise price is an item of tax preference that may require payment of an alternative minimum tax. The payment of any alternative minimum tax attributable to the exercise of an incentive stock option would be allowed as a credit against the employee’s regular tax liability in a later year to the extent the employee’s regular tax liability is in excess of the alternative minimum tax for that year.
Upon the disposition of ISO Shares that have been held for the requisite holding period (generally, at least two years from the date of grant and one year from the date of exercise of the incentive stock option), the employee will generally recognize capital gain (or loss) equal to the difference between the amount received in the disposition and the exercise price paid by the employee for the ISO Shares. However, if an employee disposes of ISO Shares that have not been held for the requisite holding period (a “disqualifying disposition”), the employee will recognize ordinary income in the year of the disqualifying disposition to the extent that the fair market value of the ISO Shares at the time of exercise of the incentive stock option (or, if less, the amount realized in the case of an arm’s-length disqualifying disposition to an unrelated party) exceeds the exercise price paid by the employee for such ISO Shares. The employee would also recognize capital gain (or, depending on the holding period, additional ordinary income) to the extent the amount realized in the disqualifying disposition exceeds the fair market value of the ISO Shares on the exercise date. If the exercise price paid for the ISO Shares exceeds the amount realized in the disqualifying disposition (in the case of an arm’s-length disposition to an unrelated party), such excess would ordinarily constitute a capital loss.
We will generally not be entitled to any U.S. federal income tax deduction upon the grant or exercise of an incentive stock option, unless the employee makes a disqualifying disposition of the ISO Shares. If an employee makes such a disqualifying disposition, we will then, subject to the discussion below under “Certain Tax Code Limitations on Deductibility,” be entitled to a tax deduction that corresponds as to timing and amount with the compensation income recognized by the employee under the rules described in the preceding paragraph.
Under current rulings, if a participant transfers previously held ordinary shares (other than ISO Shares that have not been held for the requisite holding period) in satisfaction of part or all of the exercise price of a non- qualified stock option or an incentive stock option, the participant will recognize income with respect to the ordinary shares received in the manner described above, but no additional gain will be recognized as a result of the transfer of such previously held shares in satisfaction of the non-qualified stock option or incentive stock option exercise price. Moreover, that number of ordinary shares received upon exercise that equals the number of previously held ordinary shares surrendered in satisfaction of the non-qualified stock option or incentive stock option exercise price will have a tax basis that equals, and a holding period that includes, the tax basis and holding period of the previously held ordinary shares surrendered in satisfaction of the non-qualified stock option or incentive stock option exercise price. Any additional ordinary shares received upon exercise will have a tax basis that equals the amount of cash (if any) paid by the participant, plus, in the case of a non-qualified stock option, the amount of ordinary income recognized by the participant with respect to the ordinary shares received.
Cash Awards; Deferred Units; Restricted Shares. A participant will recognize ordinary compensation income upon receipt of cash pursuant to a cash award or, if earlier, at the time such cash is otherwise made available for the participant to draw upon it. A participant will not have taxable income upon the grant of a deferred unit award but rather will generally recognize ordinary compensation income at the time the participant receives ordinary shares in satisfaction of such deferred unit award in an amount equal to the fair market value of the ordinary shares received.
Generally, a participant will not recognize taxable income upon the grant of restricted shares and we will not be entitled to any U.S. federal income deduction upon the grant of such award. The value of the restricted shares will generally be taxable to the participant as compensation income in the year or years in which the restrictions on
30 the ordinary shares lapse. Such value will equal the fair market value of the ordinary shares on the date or dates the restrictions terminate. A participant, however, may elect pursuant to Section 83(b) of the Code to treat the fair market value of the ordinary shares subject to the restricted share award on the date of such grant as compensation income in the year of the grant of the restricted share award. The participant must make such an election pursuant to Section 83(b) of the Code within 30 days after the date of grant. If such an election is made and the participant later forfeits the restricted shares to us, the participant will not be allowed to deduct, at a later date, the amount such participant had earlier included as compensation income.
A participant will be subject to withholding for U.S. federal, and generally for state and local, income taxes at the time the participant recognizes income under the rules described above with respect to the cash or the ordinary shares received pursuant to awards. Dividends that are received by a participant prior to the time that the restricted shares are taxed to the participant under the rules described in the preceding paragraph are taxed as additional compensation, not as dividend income. The tax basis of a participant in the ordinary shares received will equal the amount recognized by the participant as compensation income under the rules described in the preceding paragraph, and the participant’s holding period in such shares will commence on the date income is so recognized.
Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, we may be entitled to a deduction for U.S. federal income tax purposes that corresponds as to timing and amount with the compensation income recognized by the participant under the foregoing rules.
Certain Tax Code Limitations on Deductibility. In order for our U.S. subsidiaries to deduct the amounts described above, such amounts must be attributable to them and constitute reasonable compensation for services rendered or to be rendered and must be ordinary and necessary business expenses. Their ability to obtain a deduction for future payments under the plan could also be limited by Section 280G of the Code, which provides that certain excess parachute payments made in connection with a change of control of an employer are not deductible. Their ability to obtain a deduction for amounts paid under the plan could also be affected by Section 162(m) of the Code, which limits the deductibility, for U.S. federal income tax purposes, of compensation paid to certain employees to $1 million during any taxable year. However, certain exceptions apply to this limitation in the case of performance-based compensation. It is intended that the approval of the amended and restated incentive plan by our shareholders will satisfy certain of the requirements for the performance-based exception and that we will be able to comply with the requirements of the Code and Treasury Regulation Section 1.162-27 with respect to the grant and payment of certain performance-based awards (including certain options and share appreciation rights) under the plan so as to be eligible for the performance-based exception. However, it may not be possible in all cases to satisfy all of the requirements for the exception and we may, in our sole discretion, determine that in one or more cases it is in our best interest not to satisfy the requirements for the performance-based exception.
31 EQUITY COMPENSATION PLAN INFORMATION
The following table provides information concerning securities authorized for issuance under our equity compensation plans as of December 31, 2003.
Number of securities remaining available for Number of securities to be Weighted-average exercise future issuance under issued upon exercise of price of outstanding equity compensation plans outstanding options, options, warrants and (excluding securities warrants and rights rights reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by security holders (1) (2) (3) .... 16,926,215 $27.40 6,597,903 Equity compensation plans not approved by security holders (4).. — — — Total...... 16,926,215 $27.40 6,597,903
(1) Includes 7,195,767 shares to be issued upon exercise of options with a weighted average exercise price of $23.15 that were granted under (a) our Sedco Forex Employees Option Plan in connection with the Sedco Forex merger, which was approved by our shareholders, and (b) equity compensation plans of R&B Falcon assumed by us in connection with the R&B Falcon merger, which was approved by our shareholders.
(2) In addition to stock options, we are authorized to grant awards of restricted stock under our Long Term Incentive Plan, and 1,111,993 ordinary shares are available for future issuance pursuant to grants of restricted stock under this plan.
(3) Includes 686,331 contingent, performance-based options and 829,065 shares relating to contingent, performance-based restricted share awards in 2003 that are earnable based on the achievement of certain performance targets. The actual number of options retained and restricted shares to be issued will be determined upon completion of the two-year performance period.
(4) Does not include any shares that may be distributed under our deferred compensation plan, which has not been approved by our shareholders. Under this plan, our directors may defer any fees or retainers by investing those amounts in Transocean ordinary share equivalents or in other investments selected by the administrative committee. Amounts that are invested in the ordinary share equivalents at the time of distribution are distributed in ordinary shares. There is no limit on the number of shares directors may acquire under this plan. As of December 31, 2003, our directors had purchased 27,387 Transocean ordinary share equivalents under this plan.
SELECTION OF AUDITOR
We have selected Ernst & Young LLP as our auditor for the 2004 calendar year. Ernst & Young LLP served as our auditor for the 2003 calendar year. Although the selection and appointment of independent auditors is not required to be submitted to a vote of shareholders, the Board of Directors has decided to ask our shareholders to approve this appointment. Approval of our appointment of Ernst & Young LLP to serve as independent auditors for the year 2004 requires the affirmative vote of holders of at least a majority of the ordinary shares present in person or by proxy at the meeting and entitled to vote on the matter. If the shareholders do not approve the appointment of Ernst & Young LLP, the Board of Directors will consider the appointment of other independent auditors. A representative of Ernst & Young LLP is expected to be present at the annual general meeting with the opportunity to make a statement if so desired and to respond to appropriate questions.
32 FEES PAID TO ERNST & YOUNG LLP
Ernst & Young LLP has billed us fees as set forth in the table below for services rendered in 2003.
Audit-Related Total of Audit Fees Fees Tax Fees (1) All Other Fees
Fiscal year 2003 $600,000 $2,365,862 $1,928,942 $8,000 Fiscal year 2002 $400,000 $1,815,060 $1,081,285 $25,354 ______(1) Includes approximately $1 million and $0.6 million of tax compliance and preparation fees for the years 2003 and 2002, respectively.
The audit fees include those associated with our annual audit, reviews of our quarterly reports on Form 10- Q and statutory audits of our subsidiaries. The audit-related fees include other non-statutory audits of subsidiaries or companies in which we have an investment, accounting consultations and employee benefit plan audits. Tax fees were for tax preparation, compliance and tax advice, and “all other fees” were those for the provision of temporary offices and office services.
The audit committee pre-approves all auditing services, review or attest engagements and permitted non- audit services to be performed by our independent auditor, subject to some de minimis exceptions for non-audit services which are approved by the audit committee prior to the completion of the annual audit. No non-audit services were performed under the de minimis exception during 2003. The audit committee has considered whether the provision of services rendered in 2003 other than the audit of our financial statements and reviews of quarterly financial statements was compatible with maintaining the independence of Ernst & Young LLP and determined that the provision of such services was compatible with maintaining such independence.
The audit committee has adopted a policy and procedures for pre-approving all audit and non-audit services performed by the independent auditor. The policy requires advance approval by the audit committee of all audit and non-audit work. Unless the specific service has been previously pre-approved with respect to the 12 month period following the advance approval, the audit committee must approve a service before the independent auditor is engaged to perform the service. The audit committee has given advance approval for specified audit, audit-related and tax services for 2004. Requests for services that have received this pre-approval are subject to specified fee or budget restrictions and internal management controls as well.
HOUSEHOLDING
The SEC permits a single set of annual reports and proxy statements to be sent to any household at which two or more stockholders reside if they appear to be members of the same family. Each stockholder continues to receive a separate proxy card. This procedure, referred to as householding, reduces the volume of duplicate information stockholders receive and reduces mailing and printing expenses. A number of brokerage firms have instituted householding.
As a result, if you hold your shares through a broker and you reside at an address at which two or more stockholders reside, you will likely be receiving only one annual report and proxy statement unless any stockholder at that address has given the broker contrary instructions. However, if any such beneficial stockholder residing at such an address wishes to receive a separate annual report or proxy statement in the future, or if any such beneficial stockholder that elected to continue to receive separate annual reports or proxy statements wishes to receive a single annual report or proxy statement in the future, that stockholder should contact their broker or send a request to our corporate secretary at Eric B. Brown, Secretary, Transocean Inc., 4 Greenway Plaza, Houston, Texas 77046, telephone number (713) 232-7500. We will deliver, promptly upon written or oral request to the corporate secretary, a separate copy of the 2003 annual report and this proxy statement to a beneficial stockholder at a shared address to which a single copy of the documents was delivered.
33 2003 ANNUAL GENERAL MEETING OF SHAREHOLDERS
At our last Annual General Meeting held on May 8, 2003, our shareholders:
• elected Victor E. Grijalva, Arthur Lindenauer, Richard A. Pattarozzi and Kristian Siem as directors,
• approved the amendment of our Long-Term Incentive Plan to allow grants of incentive stock options for an additional ten-year period to May 1, 2013, and to allow a continuing right to grant stock options and share appreciation rights to our outside directors,
• approved the amendment of our Employee Stock Purchase Plan to increase the number of ordinary shares reserved for issuance under the plan from 1,500,000 to 2,500,000, and
• approved the appointment of Ernst & Young LLP as our independent auditors for 2003.
Since the 2003 Annual General Meeting, our articles and memorandum of association have not been amended and no meetings of shareholders have been held.
PROPOSALS OF SHAREHOLDERS
Shareholder Proposals in the Proxy Statement. Rule 14a-8 under the Securities Exchange Act of 1934 addresses when a company must include a shareholder’s proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders. Under Rule 14a-8, in order for your proposals to be considered for inclusion in the proxy statement and proxy card relating to our 2005 annual general meeting, your proposals must be received at our principal executive offices, 4 Greenway Plaza, Houston, Texas 77046, by no later than November 20, 2004. However, if the date of the 2004 annual general meeting changes by more than 30 days from the anniversary of the 2004 annual general meeting, the deadline is a reasonable time before we begin to print and mail our proxy materials. We will notify you of this deadline in a Quarterly Report on Form 10-Q or in another communication to you. Shareholder proposals must also be otherwise eligible for inclusion.
Shareholder Proposals and Nominations for Directors to Be Presented at Meetings. If you desire to bring a matter before an annual general meeting and the proposal is submitted outside the process of Rule 14a-8, you must follow the procedures set forth in our articles of association. Our articles of association provide generally that, if you desire to propose any business at an annual general meeting, you must give us written notice not less than 90 days prior to the anniversary of the originally scheduled date of the immediately preceding annual general meeting. However, if the date of the forthcoming annual general meeting is more than 30 days before or after that anniversary date, the deadline is the close of business on the tenth day after we publicly disclose the meeting date. The deadline under our articles of association for submitting proposals will be February 8, 2005 for the 2005 annual general meeting unless it is more than 30 days before or after the anniversary of the 2004 annual general meeting. Your notice must set forth:
• a brief description of the business desired to be brought before the meeting and the reasons for conducting the business at the meeting;
• your name and address;
• a representation that you are a holder of record of our ordinary shares entitled to vote at the meeting, or if the record date for the meeting is subsequent to the date required for shareholder notice, a representation that you are a holder of record at the time of the notice and intend to be a holder of record on the date of the meeting, and, in either case, intend to appear in person or by proxy at the meeting to propose that business; and
• any material interest you have in the business.
34 If you desire to nominate directors at an annual general meeting, you must give us written notice within the time period described in the preceding paragraph. If you desire to nominate directors at an extraordinary general meeting at which the board of directors has determined that directors will be elected, you must give us written notice by the close of business on the tenth day following our public disclosure of the meeting date. Notice must set forth:
• your name and address and the name and address of the person or persons to be nominated;
• a representation that you are a holder of record of our ordinary shares entitled to vote at the meeting or, if the record date for the meeting is subsequent to the date required for that shareholder notice, a representation that you are a holder of record at the time of the notice and intend to be a holder of record on the date of the meeting and, in either case, setting forth the class and number of shares so held, including shares held beneficially;
• a representation that you intend to appear in person or by proxy as a holder of record at the meeting to nominate the person or persons specified in the notice;
• a description of all arrangements or understandings between you and each nominee you proposed and any other person or persons under which the nomination or nominations are to be made by you;
• any other information regarding each nominee you proposed that would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and
• the consent of each nominee to serve as a director if so elected.
The chairman of the meeting may refuse to transact any business or to acknowledge the nomination of any person if you fail to comply with the foregoing procedures.
You may obtain a copy of our articles of association, in which these procedures are set forth, upon written request to Eric B. Brown, Secretary, Transocean Inc., 4 Greenway Plaza, Houston, Texas 77046.
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36 Appendix A
TRANSOCEAN
AUDIT COMMITTEE CHARTER
Purpose
The Audit Committee is to assist the Board of Directors in overseeing (1) the integrity of the financial statements of the Company, (2) the compliance by the Company with legal and regulatory requirements, (3) the independence, qualifications and performance of the Company’s independent auditors and (4) the performance of the Company’s internal audit function. Consistent with this oversight function, the Audit Committee encourages continuous improvement of and fosters adherence to the company’s policies, procedures and practices at all levels. The Audit Committee’s primary duties and responsibilities are to:
• Serve as an independent and objective party to monitor the corporation’s financial reporting process and internal control system.
• Review and appraise the performance of the Company’s independent auditors and internal audit function.
• Provide an open avenue of communication among the independent auditors, financial and senior management, the internal auditing department, and the Board of Directors.
• Prepare the audit committee report required by the rules of the Securities and Exchange Commission (the “Commission”) to be included in the Company’s annual proxy statement.
The Audit Committee will primarily fulfill these responsibilities by carrying out the activities enumerated in the section on Committee Authority and Responsibilities.
Committee Membership
The Audit Committee shall consist of at least three active members of the Board, each of whom shall be independent directors, as defined by the New York Stock Exchange, the rules and regulations of the Commission and applicable law, and free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. In no event shall an active or retired officer or employee of the Company be a member of the Committee.
The proposed committee members and Chairman of the Audit Committee shall be recommended to the Board of Directors by the Corporate Governance Committee. All members of the committee shall meet any applicable legal requirements or New York Stock Exchange requirements and shall be financially literate, and at least one member of the Committee shall have accounting or related financial management expertise. Unless otherwise determined by the Board of Directors, no member of the Audit Committee shall simultaneously serve on the audit committees of more than two other public companies.
Meetings
The Audit Committee shall meet as often as it determines but not less frequently than quarterly. The Committee should meet periodically with management, the internal auditors and the independent auditors in separate executive sessions to discuss any matters that the Committee or any of these groups believe should be discussed privately.
37 Committee Authority and Responsibilities
The Audit Committee shall have the sole authority to retain or terminate the independent auditors. The Audit Committee shall be directly responsible for the compensation and oversight of the work of the independent auditors (including resolution of disagreements between management and the independent auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the Company. The independent auditors shall report directly to the Audit Committee.
The Audit Committee shall pre-approve all auditing services, review or attest engagements and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditors, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act which are approved by the Audit Committee prior to the completion of the audit. The Audit Committee may establish policies and procedures for purposes of such pre-approval to the extent allowed by applicable law and regulations.
The Audit Committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting.
The Audit Committee shall have the authority to retain, dismiss or replace independent legal, accounting or other advisors. The Audit Committee shall have the sole authority to approve the fees and other retention terms for any advisors employed by the Audit Committee. The Company shall provide for appropriate funding, as determined by the Audit Committee, for payment of compensation to the independent auditors for the purpose of rendering or issuing an audit report or performing other audit, review or attest services for the Company and to any advisors employed by the Audit Committee and ordinary administrative expenses of the Audit Committee that are necessary or appropriate in carrying out its duties.
A. With Regard to the Independent Auditors
1. Review at least annually plans for the scope of the independent auditors’ activities, including the auditors’ performance of non-audit services, and expected fees to be incurred therefor, the auditors’ report of findings resulting from examination of the Company’s records and systems of internal accounting controls, and matters affecting their independence in the performance of the audit of Company accounts.
2. Review with Internal Audit and the independent auditors their annual audit plans, including the degree of coordination of the respective plans. The Committee should inquire as to the extent to which the planned audit scope can be relied upon to detect fraud or weaknesses in internal accounting controls.
3. Have a clear understanding with the independent auditors that they are ultimately accountable to the Audit Committee, and that the Audit Committee has ultimate authority and responsibility to engage, evaluate, and if appropriate, terminate their services. To this end, the Committee will have the exclusive authority with regard to the appointment or discharge of the independent auditors.
4. On an annual basis, obtain from the independent auditors a written communication delineating all their relationships and professional services as required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees. In addition, review with the independent auditors the nature and scope of any disclosed relationships or professional services with the Company or others, assess the independent auditors’ independence and take or recommend appropriate action to ensure the continuing independence of the auditors. Evaluate whether the provision of permitted non-audit services is compatible with maintaining the auditors’ independence.
38 5. Evaluate the independent auditors’ qualifications, performance and independence, including considering whether the independent auditors’ quality controls are adequate and the provision of permitted non-audit services is compatible with maintaining the independent auditors’ independence. In making this evaluation, the Audit Committee shall take into account the opinions of management and internal auditors. The Audit Committee shall present its conclusions with respect to the independent auditors to the full Board of Directors.
6. Obtain and review at least annually a report by the independent auditor describing the independent auditor’s internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues.
7. Review with the independent auditors the cooperation received from Management during the course of the audit and extent of any restrictions that may have affected their examination.
8. Review and discuss reports from the independent auditors on:
• All critical accounting policies and practices to be used;
• All alternative treatments within Generally Accepted Accounting Principles for policies and practices related to material items that have been discussed with Management, including ramification of the use of such alternative disclosures and treatments; and the treatment preferred by the independent auditors;
• Other material written communications between the independent auditors and Management, such as any management letter or schedule of unadjusted differences, any reports on observations and recommendations on internal controls and a listing of adjustments and reclassifications not recorded, if any, and any engagement or independence letters.
9. Discuss with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit, including any problems or difficulties encountered in the course of the audit work and management’s response, any restrictions on the scope of activities or access to requested information and any significant disagreements with management.
10. Meet separately, periodically, with the independent auditors.
11. Set clear hiring policies for employees or former employees of the independent auditors.
12. Consider whether there should be regular rotation of the independent auditing firm.
B. With Regard to the Company’s Earnings Releases and Guidance, Financial Statements and Footnotes, and Internal Accounting Control Systems
1. Discuss the Annual Report and footnotes thereto prior to its publication and discuss with the independent auditors any significant transactions not a normal part of the Company’s business, significant adjustments proposed by them, and comments submitted by the independent auditors concerning the Company’s system of internal accounting control together with Management’s actions to correct any deficiencies noted.
2. Discuss with management and the independent auditors the Company’s quarterly financial statements as well as disclosures made in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for both the Company’s quarterly and annual reports.
39 3. Review and discuss with management and the independent auditors:
• Major issues regarding accounting principles and financial statement presentations, including any significant changes in the selection or application of accounting principles, any major issues concerning the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies.
• Analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements, including analyses of the effects of alternative methods of generally accepted accounting principles on the financial statements.
This review will include the quality, not just the acceptability, of the company’s accounting principles as applied in its financial reporting in terms of clarity of disclosures, degree of aggressiveness or conservatism of the Company’s accounting principles and underlying estimates and other significant decisions made by the Company in preparing the financial disclosures.
4. Review steps taken to assure compliance with the Company’s policy regarding conflicts of interest and business ethics.
5. Review transactions or relationships between the Company and any Director, Officer, or shareholder owning more than 5% of the Company’s common stock (including any family members of the foregoing), and make recommendation to the Board of Directors concerning whether such relationships should continue.
6. Ascertain that appropriate reporting of such transactions or relationships is made to the Commission or other regulatory agencies.
7. Review the quality and depth of staffing of the Company’s financial, accounting, and internal audit personnel.
8. Review disclosures made to the Audit Committee by the Company’s CEO and CFO during their certification process for the Form 10-K and Form 10-Q about any significant deficiencies in the design or operation of internal controls or material weaknesses therein or instances of fraud involving management or other employees who have a significant role in the Company’s internal controls.
9. Review and discuss with management and the independent auditors the annual audited financial statements, and based upon the review and discussion decide whether to recommend to the Board that the audited financial statements and accompanying notes should be included in the Company’s Form 10-K.
10. Discuss the Company’s earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies.
C. With Regard to the Company’s Internal Auditors
1. Review the scope of the internal auditors’ activities, their report of findings resulting from the examination of the Company’s records, operations, and systems of internal accounting controls, and matters affecting their independence in the performance of the audit of Company accounts, including the cooperation and budgeting received from Management during the course of any audit, and the extent of any restrictions that may have affected their examination.
40 D. Other Responsibilities
1. Review expense accounts and executive perquisites of the Company’s senior officers.
2. Review litigation involving claims by shareholders of wrongdoing by or against directors, officers, or independent auditors of the Company.
3. Review and reassess the adequacy of this Charter periodically, at least annually, as conditions dictate.
4. Annually review the Audit Committee’s own performance.
5. Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
6. Discuss the Company’s policies with respect to risk assessment and risk management.
7. Prepare and approve the Audit Committee report as required by the SEC to be included in the Company’s proxy statement for the annual meeting.
8. Meet separately, periodically, with the Company’s General Counsel to review any material legal matters that may affect the Company.
9. Review any reports from the independent auditors under Section 10A(b) of the Securities Exchange Act of 1934.
10. Make regular reports to the Board of Directors.
Limitation of Audit Committee’s Role
While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company’s financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable rules and regulations. These are the responsibilities of Management and the independent auditors.
Unless he or she believes to the contrary (in which case, he or she will advise the Audit Committee of such belief), each member of the Audit Committee shall be entitled to assume and rely on (1) the integrity of those persons and organizations within and outside the Company that it receives information from and (2) the accuracy of the financial, legal and other information provided to the Audit Committee by such persons or organizations.
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42 Appendix B
LONG-TERM INCENTIVE PLAN
OF TRANSOCEAN INC.
(As Amended and Restated Effective February 12, 2004)
I. GENERAL
1.1 Purpose of the Plan
The Long-Term Incentive Plan (the “Plan”) of Transocean Inc., a Cayman Islands exempted company (the “Company”), is intended to advance the best interests of the Company and its subsidiaries by providing Directors and employees with additional incentives through the grant of options (“Options”) to purchase ordinary shares, par value US $0.01 per share of the Company (“Ordinary Shares”), share appreciation rights (“SARs”), restricted Ordinary Shares (“Restricted Shares”), deferred stock units (“Deferred Units”), cash performance awards (“Cash Awards”) and performance awards (“Performance Awards”), thereby increasing the personal stake of such Directors and employees in the continued success and growth of the Company.
1.2 Administration of the Plan
(a) With respect to awards to employees, the Plan shall be administered by the Executive Compensation Committee or other designated committee (the “Committee”) of the Board of Directors of the Company (the “Board”). The Committee shall have authority to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Committee, with respect to employees, shall be final and binding upon all affected Plan participants.
(b) With respect to awards to Eligible Directors (as defined in Section 1.3), the Plan shall be administered by the Board. The Board shall have authority to interpret conclusively the provisions of the Plan, to adopt such rules and regulations for carrying out the Plan as it may deem advisable, to decide conclusively all questions of fact arising in the application of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions and acts of the Board, with respect to Eligible Directors, shall be final and binding upon all affected Plan participants.
1.3 Eligible Participants
Employees, including officers, of the Company and its subsidiaries, and of partnerships or joint ventures in which the Company and its subsidiaries have a significant ownership interest as determined by the Committee (all of such subsidiaries, partnerships and joint ventures being referred to as “Subsidiaries”) shall be eligible for awards under the Plan.
Each Director of the Company who is not an officer or employee of the Company or any of its Subsidiaries (an “Eligible Director”) shall be eligible for awards under the Plan. Notwithstanding the foregoing, any Eligible Director may decline any such award. Eligible Directors shall not be entitled to receive awards under Section 2.6 or Article IV.
An employee or Eligible Director to whom an award is granted under the Plan may be hereinafter referred to as a “Participant.”
43 1.4 Awards Under the Plan
Awards to eligible employees under the Plan may be in the form of (a) Options to purchase Ordinary Shares, (b) SARs which may be either freestanding or issued in tandem with Options, (c) Restricted Shares, (d) Deferred Units, (e) Supplemental Payments (as defined in Section 2.4) which may be awarded with respect to Options, SARs, Restricted Shares and Deferred Units, (f) Cash Awards, (g) Performance Awards, or (h) any combination of the foregoing.
Awards to Eligible Directors under the Plan may be in the form of (a) Options to purchase Ordinary Shares, (b) SARs which may be either freestanding or issued in tandem with Options, (c) Restricted Shares, (d) Deferred Units, (e) Supplemental Payments (as defined in Section 2.4) which may be awarded with respect to Options, SARs, Restricted Shares and Deferred Units, (f) Performance Awards, or (g) any combination of the foregoing.
1.5 Shares Subject to the Plan
(a) The aggregate number of Ordinary Shares which may be issued with respect to Option and SAR awards (including those designated as Performance Awards) to employees under the Plan shall not exceed 22,900,000 shares. Of such 22,900,000 shares, the aggregate number of shares which may be issued pursuant to awards of Restricted Shares and Deferred Units (including those designated as Performance Awards) granted to employees under the Plan from and after January 31, 2001, shall not exceed 6,000,000 shares. All shares available for awards under the Plan may be issued pursuant to statutory stock options as described in Section 2.6. In addition, the aggregate number of Ordinary Shares which may be issued with respect to awards to Eligible Directors under the Plan shall not exceed 600,000.
At no time shall the number of shares issued plus the number of shares estimated by the Committee (or the Board, with respect to Eligible Directors) to be ultimately issued with respect to outstanding awards under the Plan exceed the number of shares that may be issued under the Plan. Shares distributed pursuant to the Plan may consist of authorized but unissued shares or treasury shares of the Company, as shall be determined from time to time by the Board.
(b) If any Option under the Plan shall expire, terminate or be canceled (including cancellation upon the Participant’s exercise of a related SAR) for any reason without having been exercised in full, or if any Restricted Shares or Deferred Units shall be forfeited to the Company, the unexercised Options and forfeited Restricted Shares and Deferred Units shall not count against the above limit and shall again become available for grants under the Plan (regardless of whether the Participant received dividends or other economic benefits with respect to such Options, shares or units). Ordinary Shares equal in number to the shares surrendered in payment of the option price, and Ordinary Shares which are withheld or surrendered in order to satisfy federal, state or local tax liability, shall not count against the above limit and shall again become available for grants under the Plan of any award other than a statutory stock option. If the option price per share with respect to any Option granted under the Plan is satisfied by a payment of cash to the Company by the Participant or by or for the account of the Participant, the number of Ordinary Shares equal to the cash payment to the Company divided by the fair market value of the Ordinary Shares on the payment date shall be added to the number of shares available for future grants under the Plan of any award other than a statutory stock option. Ordinary Shares delivered under the Plan as an award or in settlement of an award issued or made (a) upon the assumption, substitution, conversion or replacement of outstanding awards under a plan or arrangement of an entity acquired in a merger or other acquisition or (b) as a post-transaction grant under such a plan or arrangement of an acquired entity shall not reduce or be counted against the maximum number of Ordinary Shares available for delivery under the Plan, to the extent that the exemption for transactions in connection with mergers or acquisitions from the shareholder approval requirements of the New York Stock Exchange for equity compensation plans applies. Only the number of Ordinary Shares actually issued upon the exercise of an SAR or the payment of a Supplemental Payment shall count against the above limit, and any shares which were estimated to be used for such purposes and were not in fact so used shall again become available for grants under the Plan.
(c) No Participant shall be granted, in any fiscal year, Options, freestanding SARs, Restricted Shares, or Deferred Units, or any combination of the foregoing, covering or relating to more than 600,000 Ordinary Shares (subject to adjustment as provided in Section 6.2). No Participant shall be granted a Supplemental Payment in any
44 fiscal year with respect to more than the number of Ordinary Shares covered by or relating to Options, freestanding SARs, Restricted Shares, or Deferred Units granted to such Participant in such fiscal year.
(d) The Committee may from time to time adopt and observe such rules and procedures concerning the counting of shares against the Plan maximum or any sublimit as it may deem appropriate, including rules more restrictive than those set forth above to the extent necessary to satisfy the requirements of any national stock exchange on which the Ordinary Shares are listed or any applicable regulatory requirement.
1.6 Other Compensation Programs
The existence and terms of the Plan shall not limit the authority of the Board in compensating Directors and employees of the Company and its Subsidiaries in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time.
II. OPTIONS AND SARs
2.1 Terms and Conditions of Options
Subject to the following provisions, all Options granted under the Plan shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine.
(a) Option Price. The option price per share shall not be less than the fair market value of the Ordinary Shares (as determined by the Committee) on the date the Option is granted.
(b) Term of Option. The term of an Option shall not exceed ten years from the date of grant, except as provided pursuant to Section 2.1(g) with respect to the death of a Participant. No Option shall be exercised after the expiration of its term.
(c) Exercise of Options. Options shall be exercisable at such time or times and subject to such terms and conditions as the Committee shall specify in the Option grant. The Committee shall have discretion to, at any time, declare all or any portion of the Options held by any Participant to be immediately exercisable. An Option may be exercised in accordance with its terms as to any or all shares purchasable thereunder.
(d) Payment for Shares. The Committee may authorize payment for shares as to which an Option is exercised to be made in cash, in Ordinary Shares or in such other manner as the Committee in its discretion may provide. The Committee may provide for procedures to permit the payment for Ordinary Shares as to which an Option is exercised to be made by use of proceeds to be received from the sale of Ordinary Shares issuable pursuant to an award under the Plan.
(e) Nontransferability of Options. No Option or any interest therein shall be transferable by the Participant other than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act (“ERISA”), or the rules thereunder. During a Participant’s lifetime, all Options shall be exercisable only by such Participant or by the guardian or legal representative of the Participant.
(f) Shareholder Rights. The holder of an Option shall, as such, have none of the rights of a shareholder.
(g) Termination of Employment. The Committee shall have discretion to specify in the Option grant or an amendment thereof, provisions with respect to the period during which the Option may be exercised following the Participant’s termination of employment. Notwithstanding the foregoing, the Committee shall not permit any Option to be exercised beyond the term of the Option established pursuant to Section 2.1(b), except that the Committee may provide that, notwithstanding such Option term, an Option which is outstanding on the date of a Participant’s death shall remain outstanding and exercisable for up to one year after the Participant’s death.
45 (h) Change of Control. Notwithstanding the exercisability schedule governing any Option, upon the occurrence of a Change of Control (as defined in Section 6.10) all Options outstanding at the time of such Change of Control and held by a Participant who is an employee of the Company or its Subsidiaries or a Director of the Company at the time of such Change of Control shall become immediately exercisable and, unless the Participant agrees otherwise in writing, shall remain exercisable for the remainder of the Option term.
2.2 SARs in Tandem with Options
The Committee may, either at the time of grant of an Option or at any time during the term of the Option, grant tandem SARs with respect to all or any portion of the Ordinary Shares covered by such Option.
(a) Exercise of SARs. A tandem SAR may be exercised at any time the Option to which it relates is then exercisable, but only to the extent the Option to which it relates is exercisable, and shall be subject to the conditions applicable to such Option. When a tandem SAR is exercised, the Option to which it relates shall cease to be exercisable to the extent of the number of shares with respect to which the tandem SAR is exercised. Similarly, when an Option is exercised, the tandem SARs relating to the shares covered by such Option exercise shall terminate. Any tandem SAR which is outstanding on the last day of the term of the related Option (as determined pursuant to Section 2.1(b)) shall be automatically exercised on such date for cash without any action by the Participant.
(b) Appreciation. Upon exercise of a tandem SAR, the Participant shall receive, for each share with respect to which the tandem SAR is exercised, an amount (the “Appreciation”) equal to the amount by which the fair market value (as defined below) of an Ordinary Share on the date of exercise of the SAR exceeds the option price per share of the Option to which the tandem SAR relates. For purposes of the preceding sentence, the fair market value of an Ordinary Share shall be the average of the high and low prices of such share as reported on the consolidated reporting system. The Appreciation shall be payable in cash, Ordinary Shares, or a combination of both, at the option of the Committee, and shall be paid within 30 days of the exercise of the tandem SAR.
(c) Change of Control. Notwithstanding the foregoing, if a tandem SAR is exercised within 60 days of the occurrence of a Change of Control, (i) the Appreciation and any Supplemental Payment (as defined in Section 2.4) to which the Participant is entitled shall be payable solely in cash, and (ii) in addition to the Appreciation and the Supplemental Payment (if any), the Participant shall receive, in cash, (1) the amount by which the greater of (a) the highest market price per Ordinary Share during the 60-day period preceding exercise of the tandem SAR or (b) the highest price per Ordinary Share (or the cash-equivalent thereof as determined by the Board) paid by an acquiring person during the 60-day period preceding a Change of Control, exceeds the fair market value of an Ordinary Share on the date of exercise of the tandem SAR, plus (2) if the Participant is entitled to a Supplemental Payment, an additional payment, calculated under the same formula as used for calculating such Participant’s Supplemental Payment, with respect to the amount referred to in clause (1) of this sentence.
2.3 Freestanding SARs
The Committee may grant freestanding SARs in such form and having such terms and conditions as the Committee, in its discretion, may from time to time determine, subject to the following provisions.
(a) Base Price and Appreciation. Each freestanding SAR shall be granted with a base price, which shall not be less than the fair market value of the Ordinary Shares (as determined by the Committee) on the date the SAR is granted. Upon exercise of a freestanding SAR, the Participant shall receive, for each share with respect to which the SAR is exercised, an amount (the “Appreciation”) equal to the amount by which the fair market value (as defined below) of an Ordinary Share on the date of exercise of the SAR exceeds the base price of the SAR. For purposes of the preceding sentence, the fair market value of an Ordinary Share shall be the average of the high and low prices of such share as reported on the New York Stock Exchange composite tape. The Appreciation shall be payable in cash and shall be paid within 30 days of the exercise of the SAR.
(b) Term of SAR. The term of a freestanding SAR shall not exceed ten years from the date of grant, except as provided pursuant to Section 2.3(f) with respect to the death of the Participant. No SAR shall be exercised
46 after the expiration of its term. Any freestanding SAR which is outstanding on the last day of its term (as such term may be extended pursuant to Section 2.3(f)) and as to which the Appreciation is a positive number on such date shall be automatically exercised on such date for cash without any action by the Participant.
(c) Exercise of SARs. Freestanding SARs shall be exercisable at such time or times and subject to such terms and conditions as the Committee may specify in the SAR grant. The Committee shall have discretion to at any time declare all or any portion of the freestanding SARs then outstanding to be immediately exercisable. A freestanding SAR may be exercised in accordance with its terms in whole or in part.
(d) Nontransferability of SARs. No SAR or any interest therein shall be transferable by the Participant other than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of ERISA, or the rules thereunder. During a Participant’s lifetime, all SARs shall be exercisable only by such Participant or by the guardian or legal representative of the Participant.
(e) Shareholder Rights. The holder of an SAR shall, as such, have none of the rights of a shareholder.
(f) Termination of Employment. The Committee shall have discretion to specify in the SAR grant or an amendment thereof, provisions with respect to the period during which the SAR may be exercised following the Participant’s termination of employment. Notwithstanding the foregoing, the Committee shall not permit any SAR to be exercised beyond the term of the SAR established pursuant to Section 2.3(b), except that the Committee may provide that, notwithstanding such SAR term, an SAR which is outstanding on the date of a Participant’s death shall remain outstanding and exercisable for up to one year after the Participant’s death.
(g) Change of Control. Notwithstanding the exercisability schedule governing any SAR, upon the occurrence of a Change of Control (as defined in Section 6.10) all SARs outstanding at the time of such Change of Control and held by a Participant who is an employee of the Company or its Subsidiaries or a Director of the Company at the time of such Change of Control shall become immediately exercisable and, unless the Participant agrees otherwise in writing, shall remain exercisable for the remainder of the SAR term. In addition, the Committee may provide that if a freestanding SAR is exercised within 60 days of the occurrence of a Change of Control, in addition to the Appreciation the Participant shall receive, in cash, the amount by which the greater of (a) the highest market price per Ordinary Share during the 60-day period preceding exercise of the SAR or (b) the highest price per Ordinary Share (or the cash equivalent thereof as determined by the Board) paid by an acquiring person during the 60-day period preceding a Change of Control, exceeds the fair market value of an Ordinary Share on the date of exercise of the SAR.
2.4 Supplemental Payment on Exercise of Options or SARs
The Committee, either at the time of grant or at the time of exercise of any Option or tandem SAR, may provide for a supplemental payment (the “Supplemental Payment”) by the Company to the Participant with respect to the exercise of any Option or tandem SAR. The Supplemental Payment shall be in the amount specified by the Committee, which shall not exceed the amount necessary to pay the income tax payable to the national government with respect to both exercise of the Option or tandem SAR and receipt of the Supplemental Payment, assuming the Participant is taxed at the maximum effective income tax rate applicable thereto. Supplemental Payments shall be paid in cash within 30 days of the date of exercise of an Option or SAR (or, if later, within 30 days of the date on which income is recognized for federal income tax purposes with respect to such exercise).
2.5 Eligible Director Awards
With respect to Options, SARs and Supplemental Payment awards to Eligible Directors, the Board shall make all determinations otherwise assigned to the Committee under Article II and any reference to “employment” shall be changed to “service.”
47 2.6 Statutory Options
Subject to the limitations on Option terms set forth in Section 2.1, the Committee shall have the authority to grant (a) incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) and (b) Options containing such terms and conditions as shall be required to qualify such Options for preferential tax treatment under the Code as in effect at the time of such grant. Options granted pursuant to this Section 2.6 may contain such other terms and conditions permitted by Article II of the Plan as the Committee, in its discretion, may from time to time determine (including, without limitation, provision for SARs and Supplemental Payments), to the extent that such terms and conditions do not cause the Options to lose their preferential tax treatment. To the extent the Code and regulations promulgated thereunder require a plan to contain specified provisions in order to qualify options for preferential tax treatment, such provisions shall be deemed to be stated in the Plan. Eligible Directors shall not be entitled to receive incentive stock options as defined in Section 422 of the Code.
III. Restricted Shares and Deferred Units
3.1 Terms and Conditions of Restricted Share Awards
Subject to the following provisions, all awards of Restricted Shares under the Plan shall be in such form and shall have such terms and conditions as the Committee, in its discretion, may from time to time determine.
(a) A Restricted Share award shall specify the number of Restricted Shares to be awarded, the price, if any, to be paid by the recipient of the Restricted Shares, and the date or dates on which the Restricted Shares will vest. The vesting of Restricted Shares may be conditioned upon the completion of a specified period of employment with the Company or its Subsidiaries, upon the attainment of specified performance goals, or upon such other criteria as the Committee may determine in its sole discretion.
(b) Notwithstanding the provisions of subsection (a) above, any Restricted Share award which is a Performance Award shall not vest earlier than the first anniversary of the initial date of such award, provided that the Committee may provide for earlier vesting upon a termination of employment by reason of death, disability or retirement. Any Restricted Share award which is not a Performance Award shall not vest earlier than one-third on each of the first three anniversaries of the date of grant of such award, provided that (i) the Committee may provide for earlier vesting upon termination of employment by reason of death, disability or retirement and (ii) such restriction on vesting shall not apply to a Restricted Share award that is granted in lieu of salary or bonus. Notwithstanding the foregoing, a Restricted Share award shall fully vest upon a Change of Control of the Company (as defined in Section 6.10).
(c) Share certificates representing the Restricted Shares granted to a Participant shall be registered in the Participant’s name. Such certificates shall either be held by the Company on behalf of the Participant, or delivered to the Participant bearing a legend to restrict transfer of the certificate until the Restricted Shares have vested, as determined by the Committee. The Committee shall determine whether the Participant shall have the right to vote and/or receive dividends on the Restricted Shares before they have vested. No Restricted Shares may be sold, transferred, assigned, or pledged by the Participant until they have vested in accordance with the terms of the Restricted Share award. In the event of a Participant’s termination of employment before all of his Restricted Shares have vested, or in the event other conditions to the vesting of Restricted Shares have not been satisfied prior to any deadline for the satisfaction of such conditions set forth in the award, the Restricted Shares which have not vested shall be forfeited and any purchase price paid by the Participant shall be returned to the Participant. At the time Restricted Shares vest (and, if the Participant has been issued legended certificates of Restricted Shares, upon the return of such certificates to the Company), a certificate for such vested shares shall be delivered to the Participant (or the Beneficiary designated by such Participant in the event of death), free of all restrictions.
48 3.2 Terms and Conditions of Deferred Units
(a) A “Deferred Unit” is a unit that is equal to one Ordinary Share which is used to measure the benefits payable to a Participant under a Deferred Unit award. Each Deferred Unit award shall be subject to such terms and conditions as the Committee, in its discretion, may from time to time determine.
(b) The Deferred Unit award shall specify the number of Deferred Units awarded, the price, if any, to be paid by the recipient of the Deferred Units and the date or dates on which the Deferred Units will vest. The vesting of Deferred Units may be conditioned upon the completion of a specified period of employment with the Company or its Subsidiaries, upon the attainment of specified performance goals, or upon such other criteria as the Committee may determine in its sole discretion.
(c) Notwithstanding the provisions of subsection (b) above, any Deferred Unit award which is a Performance Award shall not vest earlier than the first anniversary of the initial date of such award, provided that the Committee may provide for earlier vesting upon a termination of employment by reason of death, disability or retirement. Any Deferred Unit award which is not a Performance Award shall not vest earlier than one-third on each of the first three anniversaries of the date of grant of such award, provided that (i) the Committee may provide for earlier vesting upon termination of employment by reason of death, disability or retirement and (ii) such restriction on vesting shall not apply to a Deferred Unit award that is granted in lieu of salary or bonus. Notwithstanding the foregoing, a Deferred Unit Award shall fully vest upon a Change of Control of the Company (as defined in Section 6.10).
(d) The Company shall set up an appropriate record (the “Deferred Unit Ledger”) that shall from time to time reflect the name of each Participant, the number of Deferred Units awarded to him and the date or dates on which the Deferred Units will vest.
(e) The Committee shall determine whether the Participant shall have the right to receive dividends on the Deferred Units before they have vested. In such cases, it is intended that the amount of the payment shall be equal to the dividend that the Participant would have received had he been the owner of a number of Ordinary Shares equal to the number of Deferred Units credited to him in the Deferred Unit Ledger as of the dividend record date. Notwithstanding the foregoing, no amount shall be paid to a Participant with respect to Deferred Units held by such Participant on a dividend record date but forfeited by him prior to the dividend payment date. No Ordinary Shares subject to a Deferred Unit award may be sold, transferred, assigned or pledged by the Participant until the Deferred Units have vested in accordance with the terms of the Deferred Unit award. In the event of a Participant’s termination of employment before all of his Deferred Units have vested, or in the event other conditions to the vesting of the Deferred Units have not been satisfied prior to any deadline for the satisfaction of such conditions set forth in the award, the Deferred Units which have not vested shall be forfeited and any purchase price paid by the Participant shall be returned to such Participant.
(f) Upon the vesting of the Deferred Units, as determined by the Committee in accordance with this Section 3.2, a certificate for the number of Ordinary Shares equal to the number of vested Deferred Units held by the Participant shall be delivered to such Participant (or the Beneficiary designated by such Participant in the event of death), free of all restrictions.
3.3 Supplemental Payment on Vesting of Restricted Shares and Deferred Units
The Committee, either at the time of grant or at the time of vesting of Restricted Stock or Deferred Units, may provide for a Supplemental Payment by the Company to the Participant in an amount specified by the Committee which shall not exceed the amount necessary to pay the federal income tax payable with respect to both the vesting of the Restricted Shares or Deferred Units and receipt of the Supplemental Payment, assuming the Participant is taxed at the maximum effective federal income tax rate applicable thereto and has not elected to recognize income with respect to the Restricted Shares or Deferred Units before the date such Restricted Shares or Deferred Units vest. The Supplemental Payment shall be paid within 30 days of each date that the Restricted Shares or Deferred Units vest. Supplemental Payments shall be paid in cash.
49 3.4 Eligible Director Awards
With respect to Restricted Shares, Deferred Units and Supplemental Payment awards to Eligible Directors, the Board shall make all determinations otherwise assigned to the Committee under this Article III and any reference to “employment” shall be changed to “service.” In addition, with respect to Eligible Directors, clause (i) of Section 3.1(b) and 3.2(c) shall include a termination of service for the convenience of the Company (as determined by the Board).
IV. CASH AWARDS
A “Cash Award” is a cash bonus paid solely on account of the attainment of one or more objective performance goals that have been preestablished by the Committee. Each Cash Award shall be subject to such terms and conditions, restrictions and contingencies, if any, as the Committee shall determine. Restrictions and contingencies limiting the right to receive a cash payment pursuant to a Cash Award shall be based on the achievement of single or multiple performance goals over a performance period established by the Committee. No employee shall receive payment for Cash Awards during any calendar year aggregating in excess of $2 million. Eligible Directors shall not be entitled to receive Cash Awards under this Plan.
V. PERFORMANCE AWARDS
5.1 Terms and Conditions of Performance Awards
The Committee shall have the right to designate any Option, SAR, Supplemental Payment, Restricted Share award, Deferred Unit award or Cash Award as a Performance Award. The grant or vesting of a Performance Award shall be subject to the achievement of performance objectives (the “Performance Objectives”) established by the Committee based on one or more of the following business criteria that apply to the employee, one or more business units or divisions of the Company or the applicable sector, or the Company as a whole, and if so desired by the Committee, by comparison with a peer group of companies: increased revenue; net income measures (including but not limited to income after capital costs and income before or after taxes); Ordinary Share price measures (including but not limited to growth measures and total shareholder return); price per Ordinary Share; market share; earnings per share (actual or targeted growth); earnings before interest, taxes, depreciation, and amortization (“EBITDA”); economic value added (or an equivalent metric); market value added; debt to equity ratio; cash flow measures (including but not limited to cash flow return on capital, cash flow return on tangible capital, net cash flow and net cash flow before financing activities); return measures (including but not limited to return on equity, return on average assets, return on capital, risk-adjusted return on capital, return on investors’ capital and return on average equity); operating measures (including operating income, funds from operations, cash from operations, after-tax operating income; sales volumes, production volumes and production efficiency); expense measures (including but not limited to overhead cost and general and administrative expense); margins; shareholder value; total shareholder return; proceeds from dispositions; total market value and corporate values measures (including ethics compliance, environmental, and safety). Unless otherwise stated, such a Performance Objective need not be based upon an increase or positive result under a particular business criterion and could include, for example, maintaining the status quo or limiting economic losses (measured, in each case, by reference to specific business criteria).
The Committee shall have the authority to determine whether the Performance Objectives and other terms and conditions of the award are satisfied, and the Committee’s determination as to the achievement of Performance Objectives relating to a Performance Award shall be made in writing. Notwithstanding the foregoing provisions, if the Committee intends for a Performance Award to be granted and administered in a manner designed to preserve the deductibility of the compensation resulting from such award in accordance with Section 162(m) of the Code, then the Performance Objectives for such particular Performance Award relative to the particular period of service to which the Performance Objectives relate shall be established by the Committee in writing (a) no later than 90 days after the beginning of such period and (b) prior to the completion of 25% of such period. The Committee shall have no discretion to modify or waive the Performance Objectives or conditions to the grant or vesting of a Performance Award unless such award is not intended to qualify as qualified performance-based compensation under Section 162(m) of the Code and the relevant award agreement provides for such discretion.
50 VI. ADDITIONAL PROVISIONS
6.1 General Restrictions
Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (a) the listing, registration or qualification of the Ordinary Shares subject or related thereto upon any securities exchange or under any state or federal law, or (b) the consent or approval of any government regulatory body, or (c) an agreement by the recipient of an award with respect to the disposition of Ordinary Shares is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) as a condition of, or in connection with, the granting of such award or the issuance, purchase or delivery of Ordinary Shares thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee.
Notwithstanding the foregoing, with respect to awards to Eligible Directors, the Board shall have the authority and discretion otherwise assigned to the Committee under this Section 6.1.
6.2 Adjustments for Changes in Capitalization
In the event of a scheme of arrangement, reorganization, recapitalization, Ordinary Share split, Ordinary Share dividend, combination of shares, rights offer, liquidation, dissolution, merger, consolidation, spin-off, sale of assets, payment of an extraordinary cash dividend, or any other change in or affecting the corporate structure or capitalization of the Company, the Committee (or the Board, with respect to Eligible Directors) shall make appropriate adjustment in the number and kind of shares authorized by the Plan (including any limitations on individual awards), in the number, price or kind of shares covered by the awards and in any outstanding awards under the Plan; provided, however, that no such adjustment shall increase the aggregate value of any outstanding award.
6.3 Amendments
(a) The Board may amend, alter, or discontinue the Plan from time to time, but no amendment, alteration or discontinuation shall be made which would impair the rights of a Participant under any award theretofore granted without the Participant’s consent, except such an amendment made to cause the Plan to comply with applicable law, stock exchange rules or accounting rules. In addition, no such amendment shall be made without the approval of the Company’s shareholders to the extent such approval is required to satisfy Rule 16b-3 under the Securities Exchange Act or 1934, as amended (the "Exchange Act") or Section 162(m) of the Code, or required by applicable law, agreement or stock exchange requirements or if such amendment would:
(i) expand the classes of persons to whom awards may be made under Section 1.3 of the Plan;
(ii) increase the number of Ordinary Shares authorized for grant under Section 1.5 of the Plan;
(iii) increase the number of Ordinary Shares which may be granted pursuant to awards to any one Participant under Section 1.5(c) of the Plan;
(iv) increase the number of shares available for Restricted Share or Deferred Unit awards;
(v) permit unrestricted Ordinary Shares to be granted other than in lieu of cash payments under other incentive plans and programs of the Company and its Subsidiaries;
(vi) allow the creation of additional types of awards;
51 (vii) permit shortening the minimum restriction periods with respect to Restricted Share awards, the minimum vesting periods with respect to Deferred Unit awards or removing or waiving Performance Objectives except to the extent permitted under Articles II and III and Section 6.3(c) of the Plan; or
(viii) change any of the provisions of this Section 6.3(a).
Subject to the above provisions, the Board shall have the authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant awards which qualify for beneficial treatment under such rules without shareholder approval.
(b) The Committee (or the Board, with respect to Eligible Directors) shall have the authority to amend any grant, prospectively or retroactively, to include any provision which, at the time of such amendment, is authorized under the terms of the Plan; however, no such amendment (i) shall cause a Performance Award intended to qualify for the Section 162(m) exemption to cease to qualify for the Section 162(m) exemption or (ii) impair the rights of any Participant without the Participant’s written consent except such amendment made to cause the award to comply with applicable law, stock exchange rules or accounting rules.
(c) If a Participant has ceased or will cease to be a Director of the Company for the convenience of the Company (as determined by the Board), the Board may amend all or any portion of such Participant’s awards so as to make such awards fully vested and exercisable and/or to specify a schedule upon which they become vested and exercisable, and/or to permit all or any portion of such awards to remain exercisable for such period as designated by the Board, but not beyond the expiration of the term established pursuant to Section 2.1(b) or 2.3(b), whichever is applicable. A Participant shall not participate in any deliberations or vote by the Board under this Section 6.3(c) with respect to his awards. The vesting schedule and exercise period for awards established by the Board pursuant to this Section 6.3(c) shall override the applicable provisions of Articles II and III to the extent inconsistent therewith.
6.4 Cancellation of Awards
Any award granted under the Plan may be canceled at any time with the consent of the Participant and a new award may be granted to such Participant in lieu thereof, which award may, in the discretion of the Committee, be on more favorable terms and conditions than the canceled award; provided, however, that the exercise price or base price of the new award shall not be less than (a) the original exercise price or base price of the Option or SAR that is relinquished in connection with the grant of such new award or (b) the then current market price of the Ordinary Shares on the date of grant of any outstanding Option or SAR that is relinquished in connection with the grant of such new award.
Notwithstanding the foregoing, with respect to awards to Eligible Directors, the Board shall have the authority and discretion otherwise assigned to the Committee under this Section 6.4.
6.5 Beneficiary
A Participant may file with the Company a written designation of Beneficiary, on such form as may be prescribed by the Committee (or the Board, with respect to Eligible Directors), to receive any Options, SARs, Restricted Shares, Deferred Units, Ordinary Shares, Supplemental Payments or any other payments that become deliverable to the Participant pursuant to the Plan after the Participant’s death. A Participant may, from time to time, amend or revoke a designation of Beneficiary. If no designated Beneficiary survives the Participant, the executor or administrator of the Participant’s estate shall be deemed to be the Participant’s Beneficiary.
6.6 Withholding
(a) Whenever the Company proposes or is required to issue or transfer Ordinary Shares under the Plan, the Company shall have the right to require the Participant to remit to the Company an amount sufficient to satisfy any applicable withholding tax liability prior to the delivery of any certificate for such shares. Whenever
52 under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any withholding tax liability.
(b) An employee entitled to receive Ordinary Shares under the Plan who has not received a cash Supplemental Payment may elect to have the minimum statutory withholding tax liability (or a specified portion thereof) with respect to such Ordinary Shares satisfied by having the Company withhold from the shares otherwise deliverable to the employee Ordinary Shares having a fair market value equal to the amount of the tax liability to be satisfied with respect to the Ordinary Shares. An election to have all or a portion of the tax liability satisfied using Ordinary Shares shall comply with such requirements as may be imposed by the Committee.
6.7 Non-Assignability
Except as expressly provided in the Plan, no award under the Plan shall be assignable or transferable by the Participant thereof except by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of ERISA, or the rules thereunder. During the life of the Participant, awards under the Plan shall be exercisable only by such Participant or by the guardian or legal representative of such Participant.
6.8 Non-Uniform Determinations
Determinations by the Committee or the Board under the Plan (including, without limitation, determinations of the persons to receive awards under the Plan; the form, amount and timing of such awards; the terms and provisions of such awards and the agreements evidencing same; and provisions with respect to termination of employment or service) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated.
6.9 No Guarantee of Employment or Directorship
The grant of an award under the Plan shall not constitute an assurance of continued employment for any period or any obligation of the Board to nominate any Director for re-election by the Company’s shareholders.
6.10 Change of Control
A “Change of Control” means:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding ordinary shares of the Company (the “Outstanding Company Ordinary Shares”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation or other entity controlled by the Company or (iv) any acquisition by any corporation or other entity pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6.10; or
(b) Individuals who, as of the date hereof, constitute the Board of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of the Company; provided, however, that for purposes of this Section 6.10 any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of the Company; or
53 (c) Consummation of a scheme of arrangement, reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Ordinary Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding ordinary shares or shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation or other entity resulting from such Business Combination (including, without limitation, a corporation or other entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Ordinary Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation or other entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding ordinary shares or shares of common stock of the corporation or other entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation or other entity except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the action of the Board of the Company providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
6.11 Duration and Termination
(a) The Plan was originally effective May 1, 1993. The Plan was amended and/or restated effective March 13, 1997, March 12, 1998, January 1, 2000 and May 8, 2003. This amendment and restatement of the Plan was adopted by the Executive Compensation Committee effective January 1, 2004, subject to the approval by the holders of a majority of outstanding Ordinary Shares (the “Majority Shareholders”) at the shareholder’s meeting to be held on May 13, 2004. If the Majority Shareholders of the Company should fail so to approve this amendment and restatement of the Plan, then this amendment and restatement shall be null and void.
(b) The Board may discontinue or terminate the Plan at any time. Such action shall not impair any of the rights of a Participant who has an award outstanding on the date of the Plan’s discontinuance or termination without the Participant’s written consent.
(c) Unless terminated earlier by the Board pursuant to subsection (b), no awards may be made under the Plan after the tenth (10th) anniversary of the date on which the Plan is approved by the Majority Shareholders in accordance with subsection (a) of this Section 6.11.
IN WITNESS WHEREOF, this document has been executed effective as of February 12, 2004.
TRANSOCEAN INC.
By: /s/ Eric B. Brown Eric B. Brown Corporate Secretary
54 ANNUAL REPORT TO SHAREHOLDERS
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ______.
Commission file number 333-75899 ______TRANSOCEAN INC. (Exact name of registrant as specified in its charter) ______
Cayman Islands 66-0582307 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
4 Greenway Plaza 77046 Houston, Texas (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (713) 232-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of class Exchange on which registered Ordinary Shares, par value $0.01 per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer. Yes [x] No [ ]
As of June 30, 2003, 319,853,774 ordinary shares were outstanding and the aggregate market value of such shares held by non-affiliates was approximately $7.0 billion (based on the reported closing market price of the ordinary shares on such date of $21.97 and assuming that all directors and executive officers of the Company are “affiliates,” although the Company does not acknowledge that any such person is actually an “affiliate” within the meaning of the federal securities laws). As of February 27, 2004, 320,711,252 ordinary shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of December 31, 2003, for its 2003 annual general meeting of shareholders, are incorporated by reference into Part III of this Form 10-K.
A-1 TRANSOCEAN INC. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
Item Page
PART I ITEM 1. Business ...... A-3 Background of Transocean...... A-3 Drilling Fleet ...... A-4 Markets...... A-9 Management Services...... A-10 Drilling Contracts...... A-10 Significant Clients ...... A-10 Regulation ...... A-11 Employees ...... A-11 Available Information ...... A-12 ITEM 2. Properties ...... A-12 ITEM 3. Legal Proceedings...... A-12 ITEM 4. Submission of Matters to a Vote of Security Holders ...... A-14 Executive Officers of the Registrant ...... A-14 PART II ITEM 5. Market for Registrant’s Common Equity and Related Shareholder Matters...... A-16 ITEM 6. Selected Consolidated Financial Data ...... A-18 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .. A-20 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk...... A-51 ITEM 8. Financial Statements and Supplementary Data ...... F-1 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .. F-45 ITEM 9A Controls and Procedures...... F-45 PART III ITEM 10. Directors and Executive Officers of the Registrant...... F-45 ITEM 11. Executive Compensation ...... F-45 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ...... F-45 ITEM 13. Certain Relationships and Related Transactions ...... F-45 ITEM 14. Principal Accounting Fees and Services ...... F-45
PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... F-45
A-2 PART I ITEM 1. Business
Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, the “Company,” “Transocean,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. As of March 1, 2004, we owned, had partial ownership interests in or operated 96 mobile offshore drilling units, excluding the fleet of TODCO (together with its subsidiaries and predecessors, unless the context requires otherwise, “TODCO”), a publicly traded drilling company in which we own a majority interest. As of this date, our fleet consisted of 32 High-Specification semisubmersibles and drillships (“floaters”), 26 Other Floaters, 26 Jackup Rigs and 12 Other Rigs. As of March 1, 2004, TODCO’s fleet consisted of 24 jackup rigs, 30 drilling barges, nine land rigs, three submersible drilling rigs and four other drilling rigs.
Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. Our primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding segments of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We also provide additional services, including management of third party well service activities. Our ordinary shares are listed on the New York Stock Exchange under the symbol “RIG.”
Transocean Inc. is a Cayman Islands exempted company with principal executive offices in the U.S. located at 4 Greenway Plaza, Houston, Texas 77046. Our telephone number at that address is (713) 232-7500.
Background of Transocean
In June 1993, the Company, then known as “Sonat Offshore Drilling Inc.,” completed an initial public offering of approximately 60 percent of the outstanding shares of its common stock as part of its separation from Sonat Inc., and in July 1995 Sonat Inc. sold its remaining 40 percent interest in the Company through a secondary public offering. In September 1996, the Company acquired Transocean ASA, a Norwegian offshore drilling company, and changed its name to “Transocean Offshore Inc.” On May 14, 1999, the Company completed a corporate reorganization by which it changed its place of incorporation from Delaware to the Cayman Islands.
In December 1999, we completed our merger with Sedco Forex Holdings Limited (“Sedco Forex”), the former offshore contract drilling business of Schlumberger Limited (“Schlumberger”). Effective upon the merger, we changed our name to “Transocean Sedco Forex Inc.” On January 31, 2001, we completed our merger transaction (the “R&B Falcon merger”) with R&B Falcon Corporation (“R&B Falcon”). We accounted for the R&B Falcon merger using the purchase method of accounting with the Company treated as the accounting acquiror. At the time of the merger, R&B Falcon operated a diverse global drilling rig fleet, consisting of drillships, semisubmersibles, jackup rigs and other units in addition to the Gulf of Mexico Shallow and Inland Water segment fleet. In May 2002, we changed our name to “Transocean Inc.”
In July 2002, we announced plans to pursue a divestiture of our Gulf of Mexico Shallow and Inland Water business, which was a part of R&B Falcon. R&B Falcon’s overall business was considerably broader than the Gulf of Mexico Shallow and Inland Water business. In preparation for this divestiture, we began the transfer of all assets and businesses out of R&B Falcon that were unrelated to the Gulf of Mexico Shallow and Inland Water business. In December 2002, R&B Falcon changed its name to TODCO and, in January 2004, the Gulf of Mexico Shallow and Inland Water business segment became known as the TODCO segment.
In February 2004, we completed an initial public offering of TODCO, in which we sold 13.8 million shares of TODCO’s class A common stock representing 23 percent of TODCO’s outstanding common stock. Before the closing of the offering, TODCO completed the transfer to us of all unrelated assets and businesses. At March 1, 2004, we held approximately 77 percent of the outstanding common stock of TODCO, represented by 46.2 million shares of class B common stock, and consolidate TODCO in our financial statements. TODCO’s class A common stock has one vote per share, and its class B common stock has five votes per share. Our current long-term intent is to dispose of our remaining interest in TODCO, which could be achieved through a number of possible transactions including additional public offerings, open market sales, sales to one or more third parties, a spin-off to our shareholders, split-off offerings to our shareholders that would allow for the opportunity to exchange our shares for shares of TODCO class A common stock or a combination of these transactions.
A-3 We provide contract drilling services in several market sectors and aggregate these operations into two business segments. Our Transocean Drilling segment (formerly called the “International and U.S. Floater Contract Drilling Services” business segment) is comprised of drillships, semisubmersibles, jackups and other drilling rigs. Our TODCO segment (formerly called the “Gulf of Mexico Shallow and Inland Water” business segment) consists of our interest in TODCO, which conducts jackup, drilling barge, land rig, submersible and other rig operations in the U.S. Gulf of Mexico and inland waters, Mexico, Trinidad and Venezuela. Our operations are aggregated into these two business segments based on the similarity of economic characteristics among the market sectors in which each operates. These characteristics include the services provided and the types of customers for which we provide these services. Although each of our business segments consists of various rig categories, the type of rig used to perform our drilling operations is dependent upon the needs and demands of our clients. As a result, operating decisions and allocation of assets and resources are determined by our customers.
For information about the revenues, operating income, assets and other information relating to our business segments and the geographic areas in which we operate, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 19 to our consolidated financial statements included in Item 8 of this report. For information about the risks and uncertainties relating to our business, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.”
Drilling Fleet
We principally use three types of drilling rigs: • drillships; • semisubmersibles; and • jackups.
Also included in our fleet are barge drilling rigs, tenders, a mobile offshore production unit, a platform drilling rig and a land rig. TODCO’s fleet consists of jackups, barge drilling rigs, submersibles, land drilling rigs, a platform rig and lake barges.
Most of our drilling equipment is suitable for both exploration and development drilling, and we normally engage in both types of drilling activity. Likewise, most of our drilling rigs are mobile and can be moved to new locations in response to client demand. All of our mobile offshore drilling units are designed for operations away from port for extended periods of time and most have living quarters for the crews, a helicopter landing deck and storage space for pipe and drilling supplies.
Transocean Drilling Fleet
As of March 1, 2004, our Transocean Drilling segment fleet of 96 rigs included: • 32 High-Specification Floaters, which are comprised of: - 13 Fifth-Generation Deepwater Floaters; - 15 Other Deepwater Floaters; and - four Other High-Specification Floaters; • 26 Other Floaters; • 26 Jackups; and • 12 Other Rigs, which are comprised of: - four barge drilling rigs; - four tenders; - one platform drilling rig; - one mobile offshore production unit; - one land rig; and - one coring drillship.
A-4 As of February 27, 2004, this segment’s fleet was located in the U.S. Gulf of Mexico (14 units), Canada (one unit), Brazil (10 units), North Europe (17 units), the Mediterranean and Middle East (nine units), the Caspian Sea (one unit), Africa (18 units), India (10 units) and Asia and Australia (16 units).
We periodically review the use of the term “deepwater” in connection with our fleet. The term as used in the drilling industry to denote a particular segment of the market varies somewhat and continues to evolve with technological improvements. We generally view the deepwater market sector as that which begins in water depths of approximately 4,500 feet.
In the first quarter of 2004, we changed the categories we use to describe this segment’s fleet into a “High- Specification Floaters” category, consisting of our “Fifth-Generation Deepwater Floaters,” “Other Deepwater Floaters” and Other “High-Specification Floaters,” an “Other Floaters” category, a “Jackups” category and an “Other Rigs” category. Within our High-Specification Floaters category, we consider our Fifth-Generation Deepwater Floaters to be those set forth in the fleet table listed below, which were built in the last construction cycle (approximately 1996-2001) and have high-pressure mud pumps and a water depth capability of 7,500 feet or greater. The Other Deepwater Floaters are generally those other semisubmersible rigs and drillships that have a water depth capacity of at least 4,500 feet and the Other High-Specification Floaters are harsh environment floaters that were built as fourth-generation rigs in the mid- to late-1980’s and have greater displacement than previously constructed rigs resulting in larger variable load capacity, more usable deck space and better motion characteristics. Our Other Floaters category is generally comprised of those non-high-specification floaters with a water depth capacity of less than 4,500 feet. The Jackups category consists of this segment’s jackup fleet, and the Other Rigs category consists of other rigs which are of a different type or use. We have changed these categories to better reflect how we view, and how we believe our investors and the industry view, our fleet in an effort to better reflect our strategic focus on the ownership and operation of premium high-specification floating rigs.
Drillships are generally self-propelled, shaped like conventional ships and are the most mobile of the major rig types. Our drillships are either dynamically positioned, which allows them to maintain position without anchors through the use of their onboard propulsion and station-keeping systems, or are operated in a moored configuration. Drillships typically have greater load capacity than semisubmersible rigs. This enables them to carry more supplies on board, which often makes them better suited for drilling in remote locations where resupply is more difficult. However, drillships are typically limited to calmer water conditions than those in which semisubmersibles can operate. Our three Enterprise-class drillships are equipped for dual-activity drilling, which is a well-construction technology we developed and patented that allows for drilling tasks associated with a single well to be accomplished in a parallel rather than sequential manner by utilizing two complete drilling systems under a single derrick. The dual-activity well-construction process is designed to reduce critical path activity and improve efficiency in both exploration and development drilling.
Semisubmersibles are floating vessels that can be submerged by means of a water ballast system such that the lower hulls are below the water surface during drilling operations. These rigs maintain their position over the well through the use of an anchoring system or computer controlled dynamic positioning thruster system. Some semisubmersible rigs are self- propelled and move between locations under their own power when afloat on the pontoons although most are relocated with the assistance of tugs. Typically, semisubmersibles are better suited for operations in rough water conditions than drillships. Our three Express-class semisubmersibles equipped with the unique tri-act derrick were designed to reduce overall well construction costs and effectively integrate new technology and working relationships.
Jackup rigs are mobile self-elevating drilling platforms equipped with legs that can be lowered to the ocean floor until a foundation is established to support the drilling platform. Once a foundation is established, the drilling platform is then jacked further up the legs so that the platform is above the highest expected waves. These rigs are generally suited for water depths of 300 feet or less.
Rigs described in the following tables as “operating” are under contract, including rigs being mobilized under contract. Rigs described as “warm stacked” are not under contract and may require the hiring of additional crew, but are generally ready for service with little or no capital expenditures and are being actively marketed. Rigs described as “cold stacked” are not being actively marketed on short or near term contracts, generally cannot be reactivated upon short notice and normally require the hiring of most of the crew, a maintenance review and possibly significant refurbishment before they can be reactivated. Our cold stacked rigs and some of our warm stacked rigs would require additional costs to return to service. The actual cost, which could fluctuate over time, is dependent upon various factors, including the availability and cost of shipyard facilities, cost of equipment and materials and the extent of repairs and maintenance that may ultimately be required. For some of these rigs, the cost could be significant. We would take these factors into consideration together with market conditions, length of contract and dayrate and other contract terms in deciding whether to return a particular idle rig to service. We may consider marketing some of our cold stacked rigs for alternative uses, including as accommodation units, from time to time until drilling activity increases and we obtain drilling contracts for these units.
A-5 High-Specification Floaters (32)
The following tables provide certain information regarding our High-Specification fleet in this segment as of February 27, 2004: Year Water Drilling Entered Depth Depth Service/ Capacity Capacity Estimated Name Type Upgraded(a) (in feet) (in feet) Location Customer Expiration (b) Fifth-Generation Deepwater Floaters (13) Deepwater Discovery (c) ...... HSD 2000 10,000 30,000 Nigeria ExxonMobil March 2004 Nigeria ExxonMobil May 2004 Deepwater Expedition (c) ...... HSD 1999 10,000 30,000 Brazil Petrobras September 2005 Deepwater Frontier (c) ...... HSD 1999 10,000 30,000 Brazil Petrobras March 2004 Deepwater Millennium (c)...... HSD 1999 10,000 30,000 U.S. Gulf Anadarko March 2004 U.S. Gulf Anadarko April 2004 U.S. Gulf Dominion May 2004 U.S. Gulf Dominion June 2004 U.S. Gulf Burlington November 2004 Deepwater Pathfinder (c) ...... HSD 1998 10,000 30,000 U.S. Gulf ChevronTexaco April 2004 Discoverer Deep Seas (c) (f) ...... HSD 2001 10,000 35,000 U.S. Gulf ChevronTexaco January 2006 Discoverer Enterprise (c) (f) ...... HSD 1999 10,000 35,000 U.S. Gulf BP December 2004 Discoverer Spirit (c) (f)...... HSD 2000 10,000 35,000 U.S. Gulf Unocal September 2005 Deepwater Horizon (c)...... HSS 2001 10,000 30,000 U.S. Gulf BP September 2004 Cajun Express (c) (g) ...... HSS 2001 8,500 35,000 U.S. Gulf Dominion May 2004 U.S. Gulf ChevronTexaco August 2004 Deepwater Nautilus (d)...... HSS 2000 8,000 30,000 U.S. Gulf Shell June 2005 Sedco Energy (c) (g)...... HSS 2001 7,500 25,000 Nigeria ChevronTexaco October 2004 Sedco Express (c) (g)...... HSS 2001 7,500 25,000 Brazil Petrobras August 2004
Other Deepwater Floaters (15) Deepwater Navigator (c)...... HSD 2000 7,200 25,000 Brazil Petrobras July 2004 Peregrine I (c) ...... HSD 1982/1996 7,200 25,000 Brazil Petrobras March 2004 Discoverer 534 (c) ...... HSD 1975/1991 7,000 25,000 India Reliance May 2004 Discoverer Seven Seas (c) ...... HSD 1976/1997 7,000 25,000 India ONGC February 2007 Transocean Marianas ...... HSS 1979/1998 7,000 25,000 U.S. Gulf Dominion March 2004 Sedco 707 (c) ...... HSS 1976/1997 6,500 25,000 Brazil Petrobras December 2005 Jack Bates ...... HSS 1986/1997 5,400 30,000 U.K. North Sea Warm stacked April 2004 U.K. North Sea TotalFinaElf June 2004 Sedco 709 (c) ...... HSS 1977/1999 5,000 25,000 Nigeria Shell May 2004 M. G. Hulme, Jr. (e)...... HSS 1983/1996 5,000 25,000 Nigeria TotalFinaElf March 2004 Nigeria TotalFinaElf June 2004 Transocean Richardson...... HSS 1988 5,000 25,000 Ivory Coast CNR October 2005 Jim Cunningham...... HSS 1982/1995 4,600 25,000 Egypt GUPCO July 2004 Transocean Leader...... HSS 1987/1997 4,500 25,000 U.K. North Sea Warm stacked May 2004 Norwegian N. Sea Statoil August 2005 Transocean Rather ...... HSS 1988 4,500 25,000 Angola ExxonMobil April 2004 Sovereign Explorer ...... HSS 1984 4,500 25,000 Las Palmas Cold stacked – Sedco 710 (c) ...... HSS 1983/1997 4,500 25,000 Brazil Petrobras October 2006
A-6 Year Water Drilling Entered Depth Depth Service/ Capacity Capacity Estimated Name Type Upgraded(a) (in feet) (in feet) Location Customer Expiration (b) Other High-Specification Floaters (4) Henry Goodrich ...... HSS 1985 2,000 30,000 Canada Terra Nova February 2005 Paul B. Loyd, Jr...... HSS 1990 2,000 25,000 U.K. North Sea BP March 2004 U.K. North Sea BP March 2005 Transocean Arctic...... HSS 1986 1,650 25,000 Norwegian N. Sea Cold stacked – Polar Pioneer...... HSS 1985 1,500 25,000 Norwegian N. Sea Norsk Hydro October 2004 Norwegian N. Sea Statoil June 2006 ______“HSD” means high-specification drillship. “HSS” means high-specification semisubmersible.
(a) Dates shown are the original service date and the date of the most recent upgrade, if any. (b) Expiration dates represent our current estimate of the earliest date the contract for each rig is likely to expire. Some rigs have two or more contracts in continuation, so the last line shows the last expected termination date. Some contracts may permit the client to extend the contract. (c) Dynamically positioned. (d) The Deepwater Nautilus is leased from its owner, an unrelated third party, pursuant to a fully defeased lease arrangement. (e) The M. G. Hulme, Jr. is leased from its owner, an unrelated third party, under an operating lease as a result of a sale/leaseback transaction in November 1995. (f) Enterprise-class rig. (g) Express-class rig.
Other Floaters (26)
The following table provides certain information regarding our Other Floater drilling rigs in this segment as of February 27, 2004: Year Water Drilling Entered Depth Depth Service/ Capacity Capacity Estimated Name Type Upgraded(a) (in feet) (in feet) Location Customer Expiration (b) Peregrine III (c)...... OD 1976 4,200 25,000 U.S. Gulf Cold stacked − Sedco 700 ...... OS 1973/1997 3,600 25,000 Equatorial Guinea Amerada Hess July 2004 Transocean Amirante ...... OS 1978/1997 3,500 25,000 U.S. Gulf Cold stacked − Transocean Legend ...... OS 1983 3,500 25,000 Brazil Petrobras May 2004 C. Kirk Rhein, Jr...... OS 1976/1997 3,300 25,000 U.S. Gulf Cold stacked − Transocean Driller ...... OS 1991 3,000 25,000 Brazil Warm stacked − Falcon 100 ...... OS 1974/1999 2,400 25,000 U.S. Gulf Cold stacked − Sedco 703 ...... OS 1973/1995 2,000 25,000 Australia BHPB March 2004 Australia Apache April 2004 Australia BHPB May 2004 Australia Apache June 2004 Australia ENI July 2004 Australia ChevronTexaco August 2004 Sedco 711 ...... OS 1982 1,800 25,000 U.K. North Sea Shell March 2004 U.K. North Sea Shell December 2004 Transocean John Shaw ...... OS 1982 1,800 25,000 U.K. North Sea Warm stacked − Sedco 714 ...... OS 1983/1997 1,600 25,000 U.K. North Sea EnCana April 2004 Sedco 712 ...... OS 1983 1,600 25,000 U.K. North Sea Cold stacked − Actinia ...... OS 1982 1,500 25,000 Egypt IEOC June 2004 Sedco 600 ...... OS 1983/1994 1,500 25,000 Singapore Warm stacked − Sedco 601 ...... OS 1983 1,500 25,000 Indonesia Schlumberger May 2004 Sedco 602 ...... OS 1983 1,500 25,000 Singapore Cold stacked − Sedco 702 ...... OS 1973/1992 1,500 25,000 Australia Cold stacked − Sedneth 701 ...... OS 1972/1993 1,500 25,000 Angola ChevronTexaco September 2004
A-7 Year Water Drilling Entered Depth Depth Service/ Capacity Capacity Estimated Name Type Upgraded(a) (in feet) (in feet) Location Customer Expiration (b) Transocean Prospect ...... OS 1983/1992 1,500 25,000 U.K. North Sea Cold stacked − Transocean Searcher ...... OS 1983/1988 1,500 25,000 Norwegian N. Sea Statoil June 2004 Norwegian N. Sea Statoil May 2005 Transocean Winner ...... OS 1983 1,500 25,000 Norwegian N. Sea Cold stacked − Transocean Wildcat ...... OS 1977/1985 1,300 25,000 U.K. North Sea Cold stacked − Transocean Explorer ...... OS 1976 1,250 25,000 U.K. North Sea Cold stacked − J. W. McLean ...... OS 1974/1996 1,250 25,000 U.K. North Sea Oilexco March 2004 Sedco 704 ...... OS 1974/1993 1,000 25,000 U.K. North Sea ChevronTexaco March 2004 U.K. North Sea ADTI May 2004 Sedco 706 ...... OS 1976/1994 1,000 25,000 U.K. North Sea Cold stacked − ______“OD” means other drillship. “OS” means other semisubmersible.
(a) Dates shown are the original service date and the date of the most recent upgrade, if any. (b) Expiration dates represent our current estimate of the earliest date the contract for each rig is likely to expire. Some rigs have two or more contracts in continuation, so the last line shows the last expected termination date. Some contracts may permit the client to extend the contract.
Jackup Rigs (26)
The following table provides certain information regarding our Jackup Rig fleet in this segment as of February 27, 2004: Water Drilling Year Entered Depth Depth Service/ Capacity Capacity Estimated Name Upgraded(a) (in feet) (in feet) Location Customer Expiration (b) Trident IX ...... 1982 400 21,000 Vietnam JVPC August 2004 Vietnam JVPC August 2005 Trident 17...... 1983 355 25,000 Vietnam Carigali June 2004 Harvey H. Ward ...... 1981 300 25,000 Malaysia Talisman July 2004 J. T. Angel ...... 1982 300 25,000 India ONGC May 2004 Roger W. Mowell ...... 1982 300 25,000 Malaysia Talisman November 2004 Ron Tappmeyer ...... 1978 300 25,000 India ONGC November 2006 D. R. Stewart ...... 1980 300 25,000 Italy ENI March 2005 Randolph Yost ...... 1979 300 25,000 India ONGC November 2006 C. E. Thornton ...... 1974 300 25,000 India ONGC June 2004 F. G. McClintock ...... 1975 300 25,000 India ONGC October 2004 Shelf Explorer ...... 1982 300 25,000 Equatorial Guinea Marathon March 2004 Transocean III ...... 1978/1993 300 20,000 Egypt Devon September 2004 Transocean Nordic ...... 1984 300 25,000 India Reliance March 2004 Trident II ...... 1977/1985 300 25,000 India ONGC May 2006 Trident IV-A ...... 1980/1999 300 25,000 Angola ChevronTexaco April 2004 Trident VI ...... 1981 300 21,000 Nigeria Warm stacked – Trident VIII ...... 1981 300 21,000 Nigeria ChevronTexaco May 2004 Trident XII ...... 1982/1992 300 25,000 India ONGC November 2006 Trident XIV ...... 1982/1994 300 20,000 Angola Warm stacked – Trident 15 ...... 1982 300 25,000 Thailand Unocal February 2005 Trident 16 ...... 1982 300 25,000 Thailand PTTEP May 2004 Trident 20 ...... 2000 350 25,000 Caspian Sea Warm stacked April 2004 Caspian Sea Petronas December 2004
A-8 Water Drilling Year Entered Depth Depth Service/ Capacity Capacity Estimated Name Upgraded(a) (in feet) (in feet) Location Customer Expiration (b) George H. Galloway ...... 1984 300 25,000 Italy ENI July 2004 Transocean Comet ...... 1980 250 20,000 Egypt GUPCO October 2005 Transocean Mercury ...... 1969/1998 250 20,000 Egypt GUPCO June 2004 United Arab Transocean Jupiter ...... 1981/1997 170 16,000 Emirates Cold stacked – ______(a) Dates shown are the original service date and the date of the most recent upgrade, if any. (b) Expiration dates represent our current estimate of the earliest date the contract for each rig is likely to expire. Some rigs have two or more contracts in continuation, so the last line shows the last expected termination date. Some contracts may permit the client to extend the contract.
Other Rigs
In addition to our floaters and jackups, we also own or operate several other types of rigs in this segment. These rigs include four drilling barges, four tenders, a platform drilling rig, a mobile offshore production unit and a land rig, as well as a coring drillship.
TODCO Fleet
As of March 1, 2004, the TODCO segment fleet consisted of 24 jackups, 30 drilling barges, three submersible rigs and a platform drilling rig, as well as nine land rigs and three lake barges. As of March 1, 2004, TODCO’s fleet was located in the U.S. (52 units), Mexico (three units), Venezuela (13 units) and Trinidad (two units). The following table contains information relating to TODCO’s fleet as of such date:
No. of Total No. Location Operating Rigs of Rigs U.S. Gulf of Mexico - Jackups 9 19 - Submersibles – 3 U.S. Inland Waters - Drilling Barges 12 30 Mexico - Jackups 2 2 Venezuela - Jackups 1 1 - Land Rigs 1 9 - Lake Barges – 3 Trinidad - Jackups 1 2 - Platform Rig – 1
Markets
Our operations are geographically dispersed in oil and gas exploration and development areas throughout the world. Rigs can be moved from one region to another, but the cost of moving a rig and the availability of rig-moving vessels may cause the supply and demand balance to vary somewhat between regions. However, significant variations between regions do not tend to exist long-term because of rig mobility. Consequently, we operate in a single, global offshore drilling market. Because our drilling rigs are mobile assets and are able to be moved according to prevailing market conditions, we cannot predict the percentage of our revenues that will be derived from particular geographic or political areas in future periods.
In recent years, there has been increased emphasis by oil companies on exploring for hydrocarbons in deeper waters. This is, in part, because of technological developments that have made such exploration more feasible and cost-effective. For this reason, water-depth capability is a key component in determining rig suitability for a particular drilling project. Another distinguishing feature in some drilling market segments is a rig’s ability to operate in harsh environments, including extreme marine and climatic conditions and temperatures.
A-9 The deepwater and mid-water market sectors are serviced by our semisubmersibles and drillships. While the use of the term “deepwater” as used in the drilling industry to denote a particular segment of the market can vary and continues to evolve with technological improvements, we generally view the deepwater market segment as that which begins in water depths of approximately 4,500 feet and extends to the maximum water depths in which rigs are capable of drilling, which is currently approximately 10,000 feet. We view the mid-water market sector as that which covers water depths of about 300 feet to approximately 4,500 feet.
The global shallow water market segment begins at the outer limit of the transition zone and extends to water depths of about 300 feet. We service this segment with our jackups and drilling tenders, which are located outside of the U.S. TODCO also operates in this market segment with jackups and submersibles. This segment has been developed to a significantly greater degree than the deepwater market segment because the shallower water depths have made it much more accessible than the deeper water market segments.
The “transition zone” market segment is characterized by marshes, rivers, lakes, shallow bay and coastal water areas. We operate in this segment using our drilling barges located in West Africa and Southeast Asia. TODCO operates in this market segment along the U.S. Gulf of Mexico coastline, which has been the world's largest market segment for barge rigs.
TODCO also conducts land rig operations in Venezuela.
Management Services
We use our engineering and operating expertise to provide management of third party drilling service activities. These services are provided through service teams generally consisting of our personnel and third party subcontractors and we frequently serve as lead contractor. The work generally consists of individual contractual agreements to meet specific client needs and may be provided on either a dayrate or fixed price basis. As of March 1, 2004, we were performing such services in the North Sea, India and Malaysia. These management service revenues did not represent a material portion of our revenues during 2003.
Drilling Contracts
Our contracts to provide offshore drilling services are individually negotiated and vary in their terms and provisions. We obtain most of our contracts through competitive bidding against other contractors. Drilling contracts generally provide for payment on a dayrate basis, with higher rates while the drilling unit is operating and lower rates for periods of mobilization or when drilling operations are interrupted or restricted by equipment breakdowns, adverse environmental conditions or other conditions beyond our control.
A dayrate drilling contract generally extends over a period of time covering either the drilling of a single well or group of wells or covering a stated term. These contracts typically can be terminated by the client under various circumstances such as the loss or destruction of the drilling unit or the suspension of drilling operations for a specified period of time as a result of a breakdown of major equipment. The contract term in some instances may be extended by the client exercising options for the drilling of additional wells or for an additional term, or by exercising a right of first refusal. In reaction to depressed market conditions, our clients may seek renegotiation of firm drilling contracts to reduce their obligations or may seek to suspend or terminate their contracts. Some drilling contracts permit the customer to terminate the contract at the customer's option without paying a termination fee. Suspension of drilling contracts results in the reduction in or loss of dayrate for the period of the suspension. If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, or if contracts are suspended for an extended period of time, it could adversely affect our results of operations.
Significant Clients
During the past five years, we have engaged in offshore drilling for most of the leading international oil companies (or their affiliates), as well as for many government-controlled and independent oil companies. Major clients included BP, Shell, Petrobras and Statoil. Our largest unaffiliated clients in 2003 were Petrobras, BP and Shell accounting for 11.8 percent, 11.1 percent and 10.7 percent, respectively, of our 2003 operating revenues. No other unaffiliated client accounted for 10 percent or more of our 2003 operating revenues. The loss of any of these significant clients could, at least in the short term, have a material adverse effect on our results of operations.
A-10 Regulation
Our operations are affected from time to time in varying degrees by governmental laws and regulations. The drilling industry is dependent on demand for services from the oil and gas exploration industry and, accordingly, is affected by changing tax and other laws generally relating to the energy business.
International contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipping and operation of drilling units, currency conversions and repatriation, oil and gas exploration and development, taxation of offshore earnings and earnings of expatriate personnel and use of local employees and suppliers by foreign contractors. Governments in some foreign countries are active in regulating and controlling the ownership of concessions and companies holding concessions, the exportation of oil and gas and other aspects of the oil and gas industries in their countries. In addition, government action, including initiatives by the Organization of Petroleum Exporting Countries (“OPEC”), may continue to cause oil price volatility. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so.
In the U.S., regulations applicable to our operations include certain regulations controlling the discharge of materials into the environment and requiring the removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment.
The U.S. Oil Pollution Act of 1990 (“OPA”) and related regulations impose a variety of requirements on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills. Few defenses exist to the liability imposed by OPA, and such liability could be substantial. Failure to comply with ongoing requirements or inadequate cooperation in a spill event could subject a responsible party to civil or criminal enforcement action.
The U.S. Outer Continental Shelf Lands Act authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the outer continental shelf. Included among these are regulations that require the preparation of spill contingency plans and establish air quality standards for certain pollutants, including particulate matter, volatile organic compounds, sulfur dioxide, carbon monoxide and nitrogen oxides. Specific design and operational standards may apply to outer continental shelf vessels, rigs, platforms, vehicles and structures. Violations of environmental related lease conditions or regulations issued pursuant to the U.S. Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and canceling leases. Such enforcement liabilities can result from either governmental or citizen prosecution.
The U.S. Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), also known as the “Superfund” law, imposes liability without regard to fault or the legality of the original conduct on some classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of a facility where a release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at a particular site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. It is not uncommon for third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We could be subject to liability under CERCLA principally in connection with TODCO’s inland activities.
Certain of the other countries in whose waters we are presently operating or may operate in the future have regulations covering the discharge of oil and other contaminants in connection with drilling operations.
Although significant capital expenditures may be required to comply with these governmental laws and regulations, such compliance has not materially adversely affected our earnings or competitive position.
Employees
We require highly skilled personnel to operate our drilling units. As a result, we conduct extensive personnel recruiting, training and safety programs. At January 31, 2004, excluding TODCO employees, we had approximately 10,100 employees, of which approximately 1,900 persons were contracted through contract labor providers. As of such date, approximately 24 percent of these employees worldwide worked under collective bargaining agreements, most of whom worked in Brazil, Norway, U.K. and Nigeria. Of these represented employees, substantially all are working under agreements that are subject to salary negotiation in 2004. These negotiations could result in higher personnel expenses, other increased costs or increased operating restrictions.
A-11 At January 31, 2004, TODCO had approximately 1,800 employees, of which approximately six percent worked under collective bargaining agreements in Trinidad and Venezuela.
Available Information
Our website address is www.deepwater.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. We make available on this website under “Investor Relations-Financial Reports,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission (“SEC”). The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including us.
You may also find information related to our corporate governance, board committees and company code of ethics at our website. Among the information you can find there is the following:
• Corporate Governance Guidelines; • Audit Committee Charter; • Corporate Governance Committee Charter; • Executive Compensation Committee Charter; • Finance and Benefits Committee Charter; and • Code of Ethics.
ITEM 2. Properties
The description of our property included under “Item 1. Business” is incorporated by reference herein.
We maintain offices, land bases and other facilities worldwide, including our principal executive offices in Houston, Texas and regional operational offices in the U.S., Brazil, France and Indonesia. Our remaining offices and bases are located in various countries in North America, South America, the Caribbean, Europe, Africa, the Middle East, India and Asia. We lease most of these facilities.
TODCO maintains principal executive offices in Houston, Texas and has operational offices in the U.S., Mexico, Trinidad and Venezuela.
ITEM 3. Legal Proceedings
In 1990 and 1991, two of our subsidiaries were served with various assessments collectively valued at approximately $5.8 million from the municipality of Rio de Janeiro, Brazil to collect a municipal tax on services. We believe that neither subsidiary is liable for the taxes and have contested the assessments in the Brazilian administrative and court systems. In October 2001, the Brazil Supreme Court rejected our appeal of an adverse lower court’s ruling with respect to a June 1991 assessment, which is valued at approximately $5 million. We are continuing to challenge the assessment and have an action to suspend a related tax foreclosure proceeding. We have received a favorable ruling in connection with a disputed August 1990 assessment but the government has appealed that ruling. We also are awaiting a ruling from the Taxpayer's Council in connection with an October 1990 assessment. If our defenses are ultimately unsuccessful, we believe that the Brazilian government-controlled oil company, Petrobras, has a contractual obligation to reimburse us for municipal tax payments required to be paid by them. We do not expect the liability, if any, resulting from these assessments to have a material adverse effect on our business or consolidated financial position.
The Indian Customs Department, Mumbai, filed a “show cause notice” against one of our subsidiaries and various third parties in July 1999. The show cause notice alleged that the initial entry into India in 1988 and other subsequent movements of the Trident II jackup rig operated by the subsidiary constituted imports and exports for which proper customs procedures were not followed and sought payment of customs duties of approximately $31 million based on an alleged 1998 rig value of $49 million, with interest and penalties, and confiscation of the rig. In January 2000, the Customs Department issued its order, which found that we had imported the rig improperly and intentionally concealed the import from the authorities, and directed us to pay a redemption fee of approximately $3 million for the rig in lieu of confiscation and to pay penalties of approximately $1 million in addition to the amount of customs duties owed. In February 2000, we filed an appeal with the Customs, Excise and Gold (Control) Appellate Tribunal (“CEGAT”) together with an application to have the
A-12 confiscation of the rig stayed pending the outcome of the appeal. In March 2000, the CEGAT ruled on the stay application, directing that the confiscation be stayed pending the appeal. The CEGAT issued its opinion on our appeal on February 2, 2001, and while it found that the rig was imported in 1988 without proper documentation or payment of duties, the redemption fee and penalties were reduced to less than $0.1 million in view of the ambiguity surrounding the import practice at the time and the lack of intentional concealment by us. The CEGAT further sustained our position regarding the value of the rig at the time of import as $13 million and ruled that subsequent movements of the rig were not liable to import documentation or duties in view of the prevailing practice of the Customs Department, thus limiting our exposure as to custom duties to approximately $6 million. Following the CEGAT order, we tendered payment of redemption, penalty and duty in the amount specified by the order by offset against a $0.6 million deposit and $10.7 million guarantee previously made by us. The Customs Department attempted to draw the entire guarantee, alleging the actual duty payable is approximately $22 million based on an interpretation of the CEGAT order that we believe is incorrect. This action was stopped by an interim ruling of the High Court, Mumbai on writ petition filed by us. We and the Customs Department both filed appeals with the Supreme Court of India against the order of the CEGAT, and both appeals have been admitted. We are now awaiting a hearing date. We and our customer agreed to pursue and obtained the issuance of documentation from the Ministry of Petroleum that, if accepted by the Customs Department, would reduce the duty to nil. The agreement with the customer further provided that if this reduction was not obtained by the end of 2001, our customer would pay the duty up to a limit of $7.7 million. The Customs Department did not accept the documentation or agree to refund the duties already paid. We are pursuing our remedies against the Customs Department and our customer. We do not expect, in any event, that the ultimate liability, if any, resulting from the matter will have a material adverse effect on our business or consolidated financial position.
In March 1997, an action was filed by Mobil Exploration and Producing U.S. Inc. and affiliates, St. Mary Land & Exploration Company and affiliates and Samuel Geary and Associates, Inc. against TODCO, the underwriters and insurance broker in the 16th Judicial District Court of St. Mary Parish, Louisiana. The plaintiffs alleged damages amounting to in excess of $50 million in connection with the drilling of a turnkey well in 1995 and 1996. The case was tried before a jury in January and February 2000, and the jury returned a verdict of approximately $30 million in favor of the plaintiffs for excess drilling costs, loss of insurance proceeds, loss of hydrocarbons and interest. The matter has now been fully resolved with all the plaintiffs. We believe that most, if not all, of the settlement amounts are covered by relevant primary and excess liability insurance policies. However, the insurers and underwriters denied coverage and one has filed a counterclaim. TODCO has instituted litigation against those insurers and underwriters to enforce its rights under the relevant policies. TODCO has settled with some of the insurers but is continuing the litigation against the remaining insurers. Pursuant to the master separation agreement with TODCO, we are responsible and will indemnify TODCO for any losses TODCO incurs from these actions and we will benefit from any recovery. We do not expect that the ultimate outcome of this case will have a material adverse effect on our business or consolidated financial position.
In October 2001, TODCO was notified by the U.S. Environmental Protection Agency (“EPA”) that the EPA had identified a subsidiary as a potentially responsible party in connection with the Palmer Barge Line superfund site located in Port Arthur, Jefferson County, Texas. Based upon the information provided by the EPA and a review of TODCO’s internal records to date, TODCO disputes its designation as a potentially responsible party. Pursuant to the master separation agreement with TODCO, we are responsible and will indemnify TODCO for any losses TODCO incurs in connection with this action. We do not expect that the ultimate outcome of this case will have a material adverse effect on our business or consolidated financial position.
In August 2003, a judgment of approximately $9.5 million was entered by the Labor Division of the Provincial Court of Luanda, Angola, against us and one of our labor contractors, Hull Blyth, in favor of certain former workers on several of our drilling rigs. The workers were employed by Hull Blyth to work on several drilling rigs while the rigs were located in Angola. When the drilling contracts concluded and the rigs left Angola, the workers’ employment ended. The workers brought suit claiming that they were not properly compensated when their employment ended. In addition to the monetary judgment, the Labor Division ordered the workers to be hired by us. We believe that this judgment is without sufficient legal foundation and have appealed the matter to the Angola Supreme Court. We further believe that Hull Blyth has an obligation to protect us from any judgment. We do not believe that the ultimate outcome of this matter will have a material adverse effect on our business or consolidated financial position.
We are involved in a number of other lawsuits, all of which have arisen in the ordinary course of our business. We do not believe that ultimate liability, if any, resulting from any such other pending litigation will have a material adverse effect on our business or consolidated financial position. We cannot predict with certainty the outcome or effect of any of the litigation matters specifically described above or of any such other pending litigation. There can be no assurance that our beliefs or expectations as to the outcome or effect of any lawsuit or other litigation matter will prove correct and the eventual outcome of these matters could materially differ from management's current estimates.
A-13 ITEM 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its security holders during the fourth quarter of 2003.
Executive Officers of the Registrant
Age as of Officer Office March 1, 2004 J. Michael Talbert...... Chairman of the Board 57 Robert L. Long ...... President and Chief Executive Officer 58 Jean P. Cahuzac...... Executive Vice President and Chief Operating Officer 50 Eric B. Brown...... Senior Vice President, General Counsel and Corporate Secretary 52 Gregory L. Cauthen...... Senior Vice President and Chief Financial Officer 46 Barbara S. Koucouthakis..... Vice President and Chief Information Officer 45 Tim L. Juran...... Vice President, Human Resources 45 Jan Rask ...... President and Chief Executive Officer of TODCO 48
The officers of the Company are elected annually by the Board of Directors. There is no family relationship between any of the above-named executive officers.
J. Michael Talbert is Chairman of the Board of the Company. Mr. Talbert served as Chief Executive Officer of the Company from August 1994 to October 2002, at which time he assumed his current position, and has been a member of the Board of Directors since August 1994. Mr. Talbert also served as Chairman of the Board of the Company from August 1994 until the time of the Sedco Forex merger and as President of the Company from the time of such merger until December 2001. Prior to assuming his duties with the Company, Mr. Talbert was President and Chief Executive Officer of Lone Star Gas Company, a natural gas distribution company and a division of Ensearch Corporation.
Robert L. Long is President, Chief Executive Officer and a member of the Board of Directors of the Company. Mr. Long served as President of the Company from December 2001 to October 2002, at which time he assumed the additional position of Chief Executive Officer and became a member of the Board of Directors. Mr. Long served as Chief Financial Officer of the Company from August 1996 until December 2001. Mr. Long served as Senior Vice President of the Company from May 1990 until the time of the Sedco Forex merger, at which time he assumed the position of Executive Vice President. Mr. Long also served as Treasurer of the Company from September 1997 until March 2001. Mr. Long has been employed by the Company since 1976 and was elected Vice President in 1987.
Jean P. Cahuzac is Executive Vice President and Chief Operating Officer of the Company. Mr. Cahuzac served as Executive Vice President, Operations of the Company from February 2001 until October 2002, at which time he assumed his current position. Mr. Cahuzac served as President of Sedco Forex from January 1999 until the time of the Sedco Forex merger, at which time he assumed the positions of Executive Vice President and President, Europe, Middle East and Africa with the Company. Mr. Cahuzac served as Vice President-Operations Manager of Sedco Forex from May 1998 to January 1999, Region Manager-Europe, Africa and CIS of Sedco Forex from September 1994 to May 1998 and Vice President/General Manager-North Sea Region of Sedco Forex from February 1994 to September 1994. He had been employed by Schlumberger since 1979.
Eric B. Brown is Senior Vice President, General Counsel and Corporate Secretary of the Company. Mr. Brown served as Vice President and General Counsel of the Company since February 1995 and Corporate Secretary of the Company since September 1995. He assumed the position of Senior Vice President in February 2001. Prior to assuming his duties with the Company, Mr. Brown served as General Counsel of Coastal Gas Marketing Company.
Gregory L. Cauthen is Senior Vice President and Chief Financial Officer of the Company. He was also Treasurer of the Company until July 2003. Mr. Cauthen served as Vice President, Chief Financial Officer and Treasurer from December 2001 until he was elected in July 2002 as Senior Vice President. Mr. Cauthen served as Vice President, Finance from March 2001 to December 2001. Prior to joining the Company, he served as President and Chief Executive Officer of WebCaskets.com, Inc., a provider of death care services, from June 2000 until February 2001. Prior to June 2000, he was employed at Service Corporation International, a provider of death care services, where he served as Senior Vice President, Financial Services from July 1998 to August 1999, Vice President, Treasurer from July 1995 to July 1998, was assigned to various special projects from August 1999 to May 2000 and had been employed in various other positions since February 1991.
A-14 Barbara S. Koucouthakis is Vice President and Chief Information Officer of the Company. Ms. Koucouthakis served as Controller of the Company from January 1990 and Vice President from April 1993 until the time of the Sedco Forex merger, at which time she assumed her current position. She has been employed by the Company since 1982.
Tim L. Juran is Vice President, Human Resources of the Company. Mr. Juran served as Region Manager, North America of the Company from February 2001 until August 2002, at which time he assumed his current position. Mr. Juran served as Vice President & Regional Manager, North America & Europe for R&B Falcon from June 1999 to February 2001 and as Vice President & Regional Manager, Europe from January 1997 to May 1999. Prior to the R&B Falcon merger, Mr. Juran had been employed by R&B Falcon since 1980.
Jan Rask is President and Chief Executive Officer of TODCO, a publicly traded drilling company in which the Company owns a majority interest. Mr. Rask was Managing Director, Acquisitions and Special Operations, of Pride International, Inc., a contract drilling company, from September 2001 to July 2002, when he joined TODCO in his current capacity. From July 1996 to September 2001, Mr. Rask was President, Chief Executive Officer and a director of Marine Drilling Companies, Inc., a contract drilling company. Mr. Rask served as President and Chief Executive Officer of Arethusa (Off-Shore) Limited from May 1993 until the acquisition of Arethusa (Off-Shore) Limited by Diamond Offshore Drilling in May 1996. Mr. Rask joined Arethusa (Off-Shore) Limited’s principal operating subsidiary in 1990 as its President and Chief Executive Officer. Mr. Rask has been a director of Veritas DGC, Inc., an integrated geophysical service company since 1998.
Brenda S. Masters, previously the Company’s Vice President and Controller, left the Company in December 2003. Mr. Cauthen now serves as the Company’s Principal Accounting Officer.
A-15 PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our ordinary shares are listed on the New York Stock Exchange (the “NYSE”) under the symbol “RIG.” The following table sets forth the high and low sales prices of our ordinary shares for the periods indicated as reported on the NYSE Composite Tape.
Price High Low
2002 First Quarter ...... $34.66 $26.51 Second Quarter...... 39.33 30.00 Third Quarter...... 31.75 19.60 Fourth Quarter ...... 25.89 18.10
2003 First Quarter ...... $24.36 $19.87 Second Quarter...... 25.90 18.40 Third Quarter...... 22.43 18.50 Fourth Quarter ...... 24.85 18.49
2004 First Quarter (through February 27) ...... $30.06 $23.10
On February 27, 2004, the last reported sales price of our ordinary shares on the NYSE Composite Tape was $29.48 per share. On such date, there were 17,564 holders of record of the Company's ordinary shares and 320,711,252 ordinary shares outstanding.
We discontinued the payment of a quarterly cash dividend, and the last dividend payment of $0.03 per share was paid on June 13, 2002. Prior to the elimination of the cash dividend, we had paid quarterly cash dividends of $0.03 per ordinary share since the fourth quarter of 1993. Any future declaration and payment of dividends will be (i) dependent upon our results of operations, financial condition, cash requirements and other relevant factors, (ii) subject to the discretion of the Board of Directors, (iii) subject to restrictions contained in our bank credit agreements and note purchase agreement and (iv) payable only out of our profits or share premium account in accordance with Cayman Islands law.
There is currently no reciprocal tax treaty between the Cayman Islands and the United States. However, under current Cayman Islands law, there is no withholding tax on dividends.
We are a Cayman Islands exempted company. Our authorized share capital is $13,000,000, divided into 800,000,000 ordinary shares, par value $0.01, and 50,000,000 preference shares, par value $0.10, of which shares may be designated and created as shares of any other classes or series of shares with the respective rights and restrictions determined by action of our board of directors. On February 27, 2004, no preference shares were outstanding.
The holders of ordinary shares are entitled to one vote per share other than on the election of directors.
With respect to the election of directors, each holder of ordinary shares entitled to vote at the election has the right to vote, in person or by proxy, the number of shares held by him for as many persons as there are directors to be elected and for whose election that holder has a right to vote. The directors are divided into three classes, with only one class being up for election each year. Directors are elected by a plurality of the votes cast in the election. Cumulative voting for the election of directors is prohibited by our articles of association.
There are no limitations imposed by Cayman Islands law or our articles of association on the right of nonresident shareholders to hold or vote their ordinary shares.
The rights attached to any separate class or series of shares, unless otherwise provided by the terms of the shares of that class or series, may be varied only with the consent in writing of the holders of all of the issued shares of that class or series or by a special resolution passed at a separate general meeting of holders of the shares of that class or series. The necessary quorum for that meeting is the presence of holders of at least a majority of the shares of that class or series. Each holder of shares of the class or series present, in person or by proxy, will have one vote for each share of the class or series of
A-16 which he is the holder. Outstanding shares will not be deemed to be varied by the creation or issuance of additional shares that rank in any respect prior to or equivalent with those shares.
Under Cayman Islands law, some matters, like altering the memorandum or articles of association, changing the name of a company, voluntarily winding up a company or resolving to be registered by way of continuation in a jurisdiction outside the Cayman Islands, require approval of shareholders by a special resolution. A special resolution is a resolution (1) passed by the holders of two-thirds of the shares voted at a general meeting or (2) approved in writing by all shareholders entitled to vote at a general meeting of the company.
The presence of shareholders, in person or by proxy, holding at least a majority of the issued shares generally entitled to vote at a meeting, is a quorum for the transaction of most business. However, different quorums are required in some cases to approve a change in our articles of association.
Our board of directors is authorized, without obtaining any vote or consent of the holders of any class or series of shares unless expressly provided by the terms of issue of that class or series, to provide from time to time for the issuance of classes or series of preference shares and to establish the characteristics of each class or series, including the number of shares, designations, relative voting rights, dividend rights, liquidation and other rights, redemption, repurchase or exchange rights and any other preferences and relative, participating, optional or other rights and limitations not inconsistent with applicable law.
Our articles of association contain provisions that could prevent or delay an acquisition of our company by means of a tender offer, proxy contest or otherwise.
The foregoing description is a summary. This summary is not complete and is subject to the complete text of our memorandum and articles of association. For more information regarding our ordinary shares and our preference shares, see our Current Report on Form 8-K dated May 14, 1999 and our memorandum and articles of association. Our memorandum and articles of association are filed as exhibits to this Report.
A-17 ITEM 6. Selected Consolidated Financial Data
The selected consolidated financial data as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 has been derived from the audited consolidated financial statements included elsewhere herein. The selected consolidated financial data as of December 31, 2001, 2000 and 1999, and for the years ended December 31, 2000 and 1999 has been derived from audited consolidated financial statements not included herein. The following data should be read in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data.”
On January 31, 2001, we completed a merger transaction with R&B Falcon. As a result of the merger, R&B Falcon became our indirect wholly owned subsidiary. The merger was accounted for as a purchase and we were treated as the accounting acquiror. The balance sheet data as of December 31, 2001 represents the consolidated financial position of the combined company. The statement of operations and other financial data for the year ended December 31, 2001 include eleven months of operating results and cash flows for the merged company.
On December 31, 1999, the merger of Transocean Offshore Inc. and Sedco Forex was completed. Sedco Forex was the offshore contract drilling service business of Schlumberger and was spun-off immediately prior to the merger transaction. As a result of the merger, Sedco Forex became a wholly owned subsidiary of Transocean Offshore Inc., which changed its name to Transocean Sedco Forex Inc. The merger was accounted for as a purchase with Sedco Forex treated as the accounting acquiror. The balance sheet data beginning as of December 31, 1999 and the statement of operations and other financial data beginning the year ended December 31, 2000 represent the consolidated financial position, cash flows and results of operations of the merged company. The statement of operations and other financial data for the year ended December 31, 1999, represent the financial position, cash flows and results of operations of Sedco Forex and not those of historical Transocean Offshore Inc.
Years ended December 31, 2003 2002 2001 2000 1999 (In millions, except per share data)
Statement of Operations Operating revenues...... $ 2,434 $ 2,674 $ 2,820 $ 1,230 $ 648 Operating income (loss) ...... 240 (2,310) 550 133 49 Income (loss) before cumulative effect of changes in accounting principles...... 18 (2,368) 253 (b) 109 (b) 58 Income (loss) before cumulative effect of changes in accounting principles per share Basic ...... $ 0.06 $ (7.42) $ 0.82 (b) $ 0.52 (b) $ 0.53 (a) Diluted ...... $ 0.06 $ (7.42) $ 0.80 (b) $ 0.51 (b) $ 0.53 (a)
Balance Sheet Data (at end of period) Total assets ...... $11,663 $12,665 $17,048 $ 6,359 $6,140 Total debt...... 3,658 4,678 5,024 1,453 1,266 Total equity...... 7,193 7,141 10,910 4,004 3,910 Dividends per share ...... $ − $ 0.06 $ 0.12 $ 0.12 −
Other Financial Data Cash provided by operating activities...... $ 526 $ 937 $ 560 $ 196 $ 241 Cash used in investing activities...... (448) (45) (26) (493) (90) Cash provided by (used in) financing activities...... (818) (531) 285 166 (159) Capital expenditures...... 496 141 506 575 537 Operating margin...... 10% N/M 20% 11% 8% ______“N/M” means not meaningful due to loss on impairments of long-lived assets.
(a) Unaudited pro forma earnings per share was calculated using the Transocean Inc. ordinary shares issued pursuant to the Sedco Forex merger agreement and the dilutive effect of Transocean Inc. stock options granted to former Sedco Forex employees at the time of the Sedco Forex merger, as applicable. (b) Income (loss) before cumulative effect of changes in accounting principles and the related basic and diluted per share amounts reflect a reclassification of loss on retirement of debt previously reported as an extraordinary item.
A-18 Operating revenues and long-lived assets by country are as follows (in millions):
Years ended December 31, 2003 2002 2001 Operating Revenues United States...... $ 753 $ 753 $ 980 Brazil ...... 317 283 356 United Kingdom ...... 212 346 355 Rest of the World (a) ...... 1,152 1,292 1,129 Total Operating Revenues...... $2,434 $2,674 $2,820
As of December 31, 2003 2002 Long-Lived Assets United States...... $ 3,320 $ 3,905 Goodwill (b) ...... 2,231 2,218 Brazil ...... 1,283 1,239 Rest of the World (a) ...... 3,650 3,391 Total Long-Lived Assets...... $10,484 $10,753 ______(a) Rest of the World represents countries in which we operate that individually had operating revenues or long-lived assets representing less than 10 percent of total operating revenues earned or total long-lived assets. (b) Goodwill resulting from the Sedco Forex and R&B Falcon mergers has not been allocated to individual countries.
A-19 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the information contained in the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data” elsewhere in this annual report.
Overview
Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, the “Company,” “Transocean,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. As of March 1, 2004, we owned, had partial ownership interests in or operated 96 mobile offshore and barge drilling units, excluding the fleet of TODCO (together with its subsidiaries and predecessors, unless the context requires otherwise, “TODCO”), a publicly traded company in which we own a majority interest. As of this date, our fleet included 32 High-Specification semisubmersibles and drillships (“floaters”), 26 Other Floaters, 26 Jackup Rigs and 12 Other Rigs. As of March 1, 2004, TODCO’s fleet consisted of 24 jackup rigs, 30 drilling barges, nine land rigs, three submersible drilling rigs and four other drilling rigs.
Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. Our primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding segments of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We also provide additional services, including management of third party well service activities.
Key measures of our total company results of operations and financial condition are as follows:
Years ended December 31, 2003 2002 Change (In millions, except dayrates and percentages) Average dayrate (a)...... $67,200 $ 74,800 $(7,600) Utilization (b)...... 57% 59% N/A Statement of Operations Operating revenue...... $2,434.3 $2,673.9 $ (239.6) Operating and maintenance expense ...... 1,610.4 1,494.2 116.2 Operating income (loss) ...... 239.7 (2,309.9) 2,549.6 Net income (loss) ...... 19.2 (3,731.9) 3,751.1 Balance Sheet Data (at end of period) Cash 474.0 1,214 (740.2) Total Assets 11,662.6 12,665.1 (1,002.5) Debt 3,658.1 4,678 (1,019.9) ______“N/A” means not applicable.
(a) Average dayrate is defined as contract drilling revenue earned per revenue earning day. (b) Utilization is the total actual number of revenue earning days as a percentage of the total number of calendar days in the period.
The decreases in our average dayrates and utilization were mainly attributable to the decline in overall market conditions primarily within our Other Floaters fleet category. The increase in our operating and maintenance expenses was primarily due to a change in accounting for client reimbursable expenses. In addition, our revenues, utilization and operating and maintenance expense were negatively impacted by a riser separation incident on the drillship Discoverer Enterprise, a well control incident on inland barge Rig 62, an electrical fire on the Peregrine I, a fire on inland barge Rig 20 and a labor strike and a restructuring of a benefit plan in Nigeria (see “—Significant Events”). With the overall market decline we have responded rapidly to reduce costs when rigs were idled. We also reduced costs by implementing standardized purchasing through negotiated agreements, nationalization of our labor force where appropriate and headcount reductions in support groups. Our 2003 financial results included the recognition of a number of non-cash charges pertaining to asset impairments and loss on debt retirements. Debt and cash decreased during 2003 primarily as a result of repayments on debt instruments as we continue to maintain our focus on debt reduction. We also increased our investment in the Fifth-Generation fleet category by purchasing the portions of the Deepwater Drilling L.L.C. (“DD LLC”) and Deepwater Drilling II L.L.C. (“DDII LLC”)
A-20 joint ventures that had previously been held by ConocoPhillips and paying off the synthetic lease financing arrangements associated with the Deepwater Pathfinder and Deepwater Frontier. See “—Acquisitions and Dispositions.”
As a result of the implementation of Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, costs we incur that are charged to our customers on a reimbursable basis are being recognized as operating and maintenance expense beginning in 2003. In addition, the amounts billed to our customers associated with these reimbursable costs are being recognized as operating revenue. The increase in operating revenues and operating and maintenance expense resulting from this implementation was approximately $100.5 million for the year ended December 31, 2003. This change in the accounting treatment for client reimbursables had no effect on our results of operations or consolidated financial position. We previously recorded these charges and related reimbursements on a net basis in operating and maintenance expense. Prior period amounts have not been reclassified, as the amounts were not material.
In the first quarter of 2004, we changed the categories we use to describe our Transocean Drilling segment fleet into a “High-Specification Floaters” category, consisting of our “Fifth-Generation Deepwater Floaters,” “Other Deepwater Floaters” and “Other High-Specification Floaters,” an “Other Floaters” category, a “Jackups” category and an “Other Rigs” category. Within our High-Specification Floaters category, we consider our Fifth-Generation Deepwater Floaters to be the semisubmersibles Deepwater Horizon, Cajun Express, Deepwater Nautilus, Sedco Energy and Sedco Express and the drillships Deepwater Discovery, Deepwater Expedition, Deepwater Frontier, Deepwater Millennium, Deepwater Pathfinder, Discoverer Deep Seas, Discoverer Enterprise, and Discoverer Spirit. These rigs were built in the last construction cycle and have high-pressure mud pumps and a water depth capability of 7,500 feet or greater. The Other Deepwater Floaters are generally those other semisubmersible rigs and drillships that have a water depth capacity of at least 4,500 feet. The Other High-Specification Floaters are those rigs capable of drilling in harsh environments that were built as fourth-generation rigs in the mid- to late-1980’s and have greater displacement than previously constructed rigs resulting in larger variable load capacity, more useable deck space and better motion characteristics. The Other Floaters category is generally comprised of those non-high-specification floaters with a water depth capacity of less than 4,500 feet. The Jackups category consists of this segment’s jackup fleet, and the Other Rigs category consists of other rigs that are of a different type or use. We changed these categories to better reflect how we view, and how we believe our investors and the industry view, our fleet in an effort to better reflect our strategic focus on the ownership and operation of premium high-specification floating rigs.
Our operations are aggregated into two reportable segments: (i) Transocean Drilling (formerly called “International and U.S. Floater Contract Drilling Services”) and (ii) TODCO (formerly called “Gulf of Mexico Shallow and Inland Water”). The Transocean Drilling segment consists of floaters, jackups and other rigs used in support of offshore drilling activities and offshore support services. The TODCO segment consists of our interest in TODCO, which conducts jackup, drilling barge, land rig, submersible and other rig operations in the U.S. Gulf of Mexico and inland waters, Mexico, Trinidad and Venezuela. We provide services with different types of drilling equipment in several geographic regions. The location of our rigs and the allocation of resources to build or upgrade rigs is determined by the activities and needs of our customers.
Significant Events
Transocean Drilling Segment
DD LLC and DDII LLC Joint Ventures—In May 2003, we purchased ConocoPhillips’ 40 percent interest in DDII LLC. DDII LLC was the lessee in a synthetic lease financing facility with a special purpose entity entered into in connection with the construction of the Deepwater Frontier. As a result of this purchase, we consolidated DDII LLC in our financial statements late in the second quarter of 2003. In December 2003, DDII LLC paid $197.5 million for the purchase of the rig through the payoff of the synthetic lease financing arrangement. In conjunction with the payoff of the synthetic lease financing arrangements, our relationship with the special purpose entity was terminated. See “—Special Purpose Entities.”
In December 2003, we purchased ConocoPhillips’ 50 percent interest in DD LLC. DD LLC was the lessee in a synthetic lease financing facility with a special purpose entity entered into in connection with the construction of the Deepwater Pathfinder. As a result of this purchase, we consolidated DD LLC in our financial statements late in the fourth quarter of 2003. In December 2003, DD LLC paid $185.3 million for the purchase of the rig through the payoff of the synthetic lease financing arrangement. In conjunction with the payoff of the synthetic lease financing arrangement, our relationship with the special purpose entity was terminated. See “—Special Purpose Entities.”
Operational Incidents—In April 2003, our deepwater drillship Peregrine I temporarily suspended drilling operations as a result of an electrical fire requiring repairs at a shipyard. The rig resumed operations in early July 2003. Operating income was negatively impacted by approximately $9.5 million due to the loss of dayrate and related expenses. See “— Historical 2003 compared to 2002.”
A-21 In April 2003, we announced that drilling operations had ceased on four of our mobile offshore drilling units located offshore Nigeria due to a strike by local members of the labor unions in Nigeria on the semisubmersible rigs M.G. Hulme, Jr. and Sedco 709 and the jackup rigs Trident VI and Trident VIII. All of these rigs returned to operations in May and June 2003. Labor issues in Nigeria were resolved and settled in the fourth quarter of 2003. Operating income was negatively impacted by approximately $26.6 million due to loss of dayrate and the restructuring of the Nigeria defined benefit plan (see “—Defined Benefit Pension Plans”).
In May 2003, we announced that a drilling riser had separated on our deepwater drillship Discoverer Enterprise and that the rig had temporarily suspended drilling operations for our customer. The rig resumed operations in July 2003. Operating income for the year ended December 31, 2003 was negatively impacted by approximately $46.4 million due to expenses incurred on the Discoverer Enterprise as well as several other of our Fifth-Generation Deepwater Floaters related to the drilling riser separation and a related disagreement with our customer that was resolved in the first quarter of 2004. See “—Historical 2003 compared to 2002.” We are currently in discussions with our insurers relating to an insurance claim for a portion of our losses stemming from this incident.
TODCO Segment
IPO—In February 2004, we completed the initial public offering (“IPO”) of TODCO, in which we sold 13.8 million shares of TODCO’s class A common stock, representing approximately 23 percent of TODCO’s total outstanding shares, at $12.00 per share. We received net proceeds of $155.7 million from the IPO and expect to recognize a gain of approximately $43 million in the first quarter of 2004, which represents the excess of net proceeds received over the net book value of the shares of TODCO sold in the IPO. Additionally, as a result of the deconsolidation of TODCO from our other U.S. subsidiaries for U.S. federal income tax purposes in conjunction with the IPO, we expect to establish a valuation allowance against the deferred tax assets of TODCO in excess of its deferred tax liabilities. The amount of such valuation allowance will depend upon many factors, including the ultimate allocation of tax benefits between TODCO and other Transocean subsidiaries under applicable law and taxable income for calendar year 2004. The amount of the valuation allowance could be as much as or more than the gain on the sale of the TODCO shares in the IPO.
As of March 1, 2004, we held an approximate 77 percent interest in TODCO, represented by 46.2 million shares of class B common stock, and we have approximately 94 percent of the outstanding voting interest in TODCO. Each share of our class B common stock has five votes per share compared to one vote per share of the class A common stock. We consolidate TODCO in our financial statements and expect to continue to consolidate TODCO in our financial statements until we no longer own a majority voting interest. Because the IPO had not been completed by the end of the third quarter of 2003, we recognized $8.8 million of costs relating to the IPO in general and administrative expense for the year ended December 31, 2003, of which $3.1 million was incurred and deferred during 2002. TODCO was formerly known as R&B Falcon Corporation (“R&B Falcon”). Before the closing of the IPO, TODCO transferred to us all assets and businesses unrelated to TODCO’s business. R&B Falcon’s business was previously considerably broader than TODCO’s ongoing business.
Operational Incidents—In June 2003, TODCO incurred a loss as a result of a well blowout and fire aboard inland barge Rig 62. During the year ended December 31, 2003, TODCO incurred a $7.6 million loss relating to this incident. While the loss did not exceed our insurance deductible for this incident, we do not expect any additional amounts that may be incurred related to this incident to have a material adverse affect on our consolidated financial statements or results of operations. See “—Historical 2003 compared to 2002.”
In September 2003, TODCO recorded a loss of approximately $3.5 million on inland barge Rig 20 as a result of a fire. While the loss did not exceed our insurance deductible for this incident, we do not expect any additional amounts that may be incurred related to this incident to have a material adverse affect on our consolidated financial statements or results of operations. See “—Historical 2003 compared to 2002.”
Outlook
Drilling Market—Commodity prices were at historically strong levels during 2003, and we believe commodity price indicators point towards continued near-term strength in oil and gas prices. While future commodity price expectations have historically been a key driver for offshore drilling demand, the availability of quality drilling prospects, relative production costs, the stage of reservoir development and political and regulatory environments all affect our customers’ drilling programs. Strong commodity prices did not result in significant increased offshore drilling activity in the fourth quarter or in 2003 generally.
Prospects for our High-Specification Floaters appear relatively stable over the next six months, with expected improvement in the latter half of the year and in 2005. A number of our Fifth-Generation Deepwater Floaters will conclude
A-22 longer term contracts in 2004 and will be pursuing future work, so intermittent idle time is possible for these units. However, we have recently been successful in securing work for five of our High-Specification Floaters that ended term contracts in late 2003 and early 2004, with three of these units obtaining long-term contracts and the other two obtaining shorter-term exploratory work. We continue to believe that over the long term, deepwater exploration and development drilling opportunities in the Gulf of Mexico, West Africa and other market sectors represent a significant source of future deepwater rig demand. We have also seen an unexpected increase in bid activity in Norway, which presents opportunities for our Other High-Specification Floaters.
The level of activity for the non-U.S. jackup market sector is expected to increase in 2004. There is currently a modest overcapacity in the West Africa jackup market sector, but it is expected to dissipate by mid-2004. The Middle East and India are both expected to see increases in jackup demand in 2004. As a result of the anticipated increased activity, we believe jackup dayrates will generally meet or exceed levels achieved in each non-U.S. geographic market sector in 2003.
The outlook for our Other Floaters that operate in the mid-water market sector remains weak as this sector continues to be significantly oversupplied globally. We expect overall North Sea industry fleet utilization to remain at current levels until the expected normal seasonal increase in demand in the summer months. We expect the Norwegian sector to improve over the remainder of the year. Demand in the U.S. Gulf of Mexico market sector continues to be dampened by increased competition from deepwater rigs operating below their full water depth capability.
The TODCO segment continues to benefit from a declining base of jackup rig supply in the Gulf of Mexico, which has helped to lift utilization and dayrates in an otherwise flat rig demand environment. With a potential increase in international jackup activity causing a further reduction in supply, dayrates are expected to generally remain stable. Demand in the inland waters of Louisiana and Texas for drilling barges has remained flat over the past quarter. We believe there are signs of increased drilling of deep wells greater than 18,000 feet in these inland areas in 2004, which could increase the utilization and dayrates in this segment.
Our operations are geographically dispersed in oil and gas exploration and development areas throughout the world. Rigs can be moved from one region to another, but the cost of moving a rig and the availability of rig-moving vessels may cause the supply and demand balance to vary somewhat between regions. However, significant variations between regions do not tend to exist long-term because of rig mobility. Consequently, we operate in a single, global offshore drilling market.
The offshore contract drilling market remains highly competitive and cyclical, and it has been historically difficult to forecast future market conditions. Extraneous risks include declines in oil and/or gas prices that reduce rig demand and adversely affect utilization and dayrates. Major operator and national oil company capital budgets are key drivers of the overall business climate, and these may change within a fiscal year depending on exploration results and other factors. Additionally, increased competition for our customers’ drilling budgets could come from, among other areas, land-based energy markets in Russia, other former Soviet Union states and the Middle East.
As of February 27, 2004, approximately 45 percent of our Transocean Drilling segment fleet days were committed for the remainder of 2004 and approximately 18 percent for the year 2005. For our TODCO segment, which has traditionally operated under short-term contracts, committed fleet days were approximately seven percent for the remainder of 2004 and three percent are currently committed for the year 2005.
Tax Matters—As a result of our reorganization in 1999, we became a Cayman Islands company in a transaction commonly referred to as an “inversion.” Legislation in various forms has been introduced in the U.S. House of Representatives and Senate that would change the tax law applicable to companies that have completed inversion transactions. Some of the proposals would have retroactive application and would treat us as a U.S. corporation. Other proposals would impose additional limitations on the deductibility, for U.S. federal income tax purposes, of intercompany interest expense and could also make it more difficult to integrate acquired U.S. businesses with existing operations or to undertake internal restructuring. We cannot provide any assurance as to what form, if any, final legislation will take or the impact such legislation will ultimately have.
Our income tax returns are subject to review and examination in the various jurisdictions in which we operate. The U.S. Internal Revenue Service is currently auditing our tax returns for calendar years 1999, the year we became a Cayman Islands company, and 2000. In addition, other tax authorities have examined the amounts of income and expense subject to tax in their jurisdiction for prior periods. We are currently contesting various non-U.S. assessments that have been asserted and would expect to contest any future U.S. or non-U.S. assessments. While we cannot predict or provide assurance as to the final outcome of existing or future assessments, we do not believe that the ultimate resolution of these asserted income tax liabilities will have a material adverse effect on our business or consolidated financial position.
A-23 As a result of the deconsolidation of TODCO from our other U.S. subsidiaries for U.S. federal income tax purposes in conjunction with the IPO, we expect to establish a valuation allowance against the deferred tax assets of TODCO in excess of its deferred tax liabilities. The amount of such valuation allowance will depend upon many factors, including the ultimate allocation of tax benefits between TODCO and our other subsidiaries under applicable law and taxable income for calendar year 2004. The amount of the valuation allowance could be as much as or more than the gain on the sale of the TODCO shares in the IPO (see “—Significant Events”).
Insurance—In January 2003, we renewed our principal insurance coverages for property damage, liability, and occupational injury and illness. Premiums for such coverages would have increased substantially were it not for us taking significantly higher deductibles. The increased premiums were a result of increased rates demanded by the insurance markets for most insurance coverages as a result of losses the insurance industry has sustained in the past several years and perceived increased risks following the terrorist attacks on September 11, 2001. The renewal of these coverages was for the period January 1, 2003 through March 1, 2004.
We renewed these insurance coverages as of March 1, 2004 for a 14-month period ending May 1, 2005. Although premiums for these coverages were somewhat lower, we again chose to increase deductibles to reduce premiums further, given our continued improvement in our loss history. If our property and occupational illness claim experience in 2004 is comparable to 2003, we would expect a small decrease in our insurance expenses related to property damage, liabilities, and occupational injury and illness coverages. Because of the increase in our deductible exposure for 2004, an increase in our loss experience could result in higher insurance related expense for the period.
During the second quarter of 2003, we renewed our directors’ and officers’ liability insurance. Insurance markets have demanded significant premium increases for this type of insurance. As a result, we chose to increase our deductible substantially and agreed to co-insure losses with the underwriters in order to mitigate increased premiums. We expect to renew our directors’ and officers’ insurance in 2004 with substantially the same structure. At this time, we expect the cost of such insurance to rise slightly.
Stock-Based Compensation Expense—As a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) 123, Accounting for Stock-Based Compensation, our stock-based compensation expense is expected to increase in 2004. The increase will result from the impact of a full year of expense related to our 2003 awards, compared to six months of expense in 2003, and expense related to our 2004 awards, expected to occur in July 2004. Future periods will continue to have increases in stock-based compensation expense until the impact of the layering effect of future awards is normalized. In conjunction with the TODCO IPO, TODCO granted stock option and nonvested restricted share awards to certain key employees. Due to accelerated vesting provisions outlined in certain key executives employment agreements, TODCO expects to record a charge of approximately $5.6 million during the first quarter of 2004, and a total of $10.8 million during 2004 related to its stock-based compensation awards. Additionally, TODCO expects to recognize approximately $1.5 million of expense during the first quarter of 2004 related to a modification of our options issued in prior periods to TODCO employees for which vesting was accelerated and all unvested options became fully vested, and the exercise term extended through the life of the option, under the employee matters agreement executed in connection with the TODCO IPO.
Debt Retirement—In February 2004, we announced the redemption of our 9.5% Senior Notes due December 2008 at the make-whole premium price provided in the indenture. The redemption is expected to be completed by March 30, 2004. The face value of the bonds to be redeemed is $289.8 million. Based on interest rates at March 1, 2004, the cost to redeem these bonds is expected to be approximately $366.3 million, and we expect to recognize a loss on retirement of debt of approximately $24.1 million, which reflects adjustments for fair value of the debt at the merger transaction (“R&B Falcon merger”) with R&B Falcon in January 2001 and the premium on the termination of the related interest rate swap. These amounts could vary depending upon actual interest rates. We expect to utilize existing cash balances, which includes proceeds from the TODCO IPO, to fund this redemption. The redemption does not affect the 9.5% Senior Notes due December 2008 of TODCO.
A-24 Performance and Other Key Indicators
Fleet Utilization and Dayrates—The following table shows our average dayrate and utilization for the quarterly periods ending on or prior to December 31, 2003. Average dayrate is defined as contract drilling revenue earned per revenue earning day in the period. Utilization in the table below is defined as the total actual number of revenue earning days in the period as a percentage of the total number of calendar days in the period for all drilling rigs in our fleet.
Three Months Ended December 31, September 30, December 31, 2003 2003 2002 Average Dayrates (a)(b)
Transocean Drilling Segment: High-Specification Floaters Fifth-Generation Deepwater Floaters...... $186,500 $176,600 $188,700 Other Deepwater Floaters...... $101,400 $112,500 $120,400 Other High-Specification Floaters ...... $117,900 $117,200 $121,600 Total High-Specification Floaters ...... $141,800 $142,200 $146,300 Other Floaters...... $ 60,600 $ 60,600 $ 76,800 Jackups...... $ 53,700 $ 54,400 $ 57,700 Other Rigs ...... $ 45,200 $ 48,800 $ 36,200 Segment Total...... $ 87,900 $ 89,000 $ 96,100
TODCO Segment: Jackups and Submersibles ...... $ 25,800 $ 20,800 $ 21,700 Inland Barges...... $ 17,200 $ 16,900 $ 19,600 Other Rigs ...... $ 20,700 $ 20,500 $ 19,400 Segment Total...... $ 21,500 $ 19,300 $ 20,300
Total Drilling Fleet ...... $ 67,400 $ 67,000 $ 74,300
Utilization (a)(b)
Transocean Drilling Segment: High-Specification Floaters Fifth-Generation Deepwater Floaters...... 91% 97% 96% Other Deepwater Floaters ...... 69% 73% 96% Other High-Specification Floaters ...... 74% 74% 75% Total High-Specification Floaters ...... 78% 82% 93% Other Floaters...... 47% 51% 55% Jackups...... 81% 85% 83% Other Rigs ...... 53% 49% 48% Segment Total...... 68% 71% 74%
TODCO Segment: Jackups and Submersibles ...... 52% 54% 33% Inland Barges...... 40% 38% 44% Other Rigs ...... 24% 38% 27% Segment Total...... 40% 44% 37%
Total Drilling Fleet ...... 56% 59% 58% ______(a) Applicable to all rigs. (b) Effective January 1, 2003, the calculation of average dayrates and utilization was changed to include all rigs based on contract drilling revenues. Prior periods have been restated to reflect the change.
Contract Drilling Revenue—Our contract drilling revenues are based primarily on dayrates received for our drilling services and the number of operating days during the relevant periods. The level of our contract drilling revenue depends on dayrates, which in turn are primarily a function of industry supply and demand for drilling units in the markets in which we
A-25 operate. During periods of high demand, our rigs typically achieve higher utilization and dayrates than during periods of low demand. Some of our drilling contracts also enable us to earn mobilization, contract preparation, capital upgrade, and bonus and demobilization revenue. Mobilization, contract preparation and capital upgrade revenue earned on a lump sum basis is recognized over the original contract term. Bonus and demobilization revenue is recognized when earned.
Operating and Maintenance Costs—Our operating and maintenance costs represent all direct and indirect costs associated with the operation and maintenance of our drilling rigs. The principal elements of these costs are direct and indirect labor and benefits, repair and maintenance, insurance, boat and helicopter rentals, professional and technical fees, freight costs, communications, customs duties, tool rentals and services, fuel and water, general taxes and licenses. Labor, repair and maintenance and insurance costs represent the most significant components of our operating and maintenance costs.
We do not expect operating and maintenance expenses to necessarily fluctuate in proportion to changes in operating revenues. Operating revenues may fluctuate as a function of changes in dayrate; however, costs for operating a rig are generally fixed or only semi-variable regardless of the dayrate being earned. In addition, should our rigs incur idle time between contracts, we typically do not de-man those rigs because we will use the crew to prepare the rig for its next contract. During times of reduced activity, reductions in costs may not be immediate as portions of the crew may be required to prepare our rigs for stacking, after which time the crew members are assigned to active rigs or dismissed. In general, labor costs increase primarily due to higher salary levels and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity the unit is performing and the age and condition of the equipment. In addition, due to unfavorable insurance market conditions and the resulting increase in premiums, our insurance deductibles increased effective December 2002. Our deductible level for the year 2003 under our hull and machinery and our protection and indemnity policies was $10.0 million per occurrence. While our deductible per occurrence will remain unchanged in 2004, our overall aggregate insurance deductible has increased for the upcoming policy year.
Depreciation Expense—Our depreciation expense is based on estimates, assumptions and judgments relative to capitalized costs, useful lives and salvage values of our assets. We generally compute depreciation using the straight-line method after allowing for salvage values.
General and Administrative Expense—General and administrative expense includes all costs related to our corporate executives, directors, investor relations, corporate accounting and reporting, information technology, internal audit, legal, tax, treasury, risk management and human resource functions.
Interest Expense—Interest expense consists of financing cost amortization and interest associated with our senior notes and other debt. Interest expense is partially offset by the amortization of gains on interest rate swaps terminated during 2003. We expect the amortization of these gains to continue over the life of the related debt instruments (see “—Derivative Instruments”).
Income Taxes—Provisions for income taxes are based on expected taxable income, statutory rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Taxable income may differ from pre-tax income for financial accounting purposes, particularly in countries with revenue-based taxes. There is no expected relationship between the provision for income taxes and income before income taxes because the countries in which we operate have different taxation regimes. We provide a valuation allowance for deferred tax assets when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. See “—Critical Accounting Policies.”
Financial Condition
December 31, 2003 compared to December 31, 2002
December 31, 2003 2002 Change % Change (In millions, except % change) Total Assets Transocean Drilling ...... $10,874.0 $11,804.1 $ (930.1) (8)% TODCO...... 788.6 861.0 (72.4) (8)% $11,662.6 $12,665.1 $(1,002.5) (8)%
The decrease in the Transocean Drilling segment assets was mainly due to a decrease in cash and cash equivalents ($551.4 million) that resulted primarily from the repayment of debt during 2003 and depreciation ($416.0 million). The decrease in TODCO segment assets was primarily due to depreciation ($92.2 million) and asset impairments ($11.3 million),
A-26 partially offset by an increase in total assets due to the consolidation of Delta Towing Holdings, LLC (“Delta Towing”) ($6.7 million) as a result of the early adoption of Financial Accounting Standards Board’s (“FASB”) Interpretation (“FIN”) 46, Consolidation of Variable Interest Entities (as revised December 2003) (see “—New Accounting Pronouncements”).
Liquidity and Capital Resources
Sources and Uses of Cash
Years ended December 31, 2003 2002 Change (In millions) Net Cash Provided by Operating Activities Net income (loss)...... $ 19.2 $(3,731.9) $ 3,751.1 Depreciation...... 508.2 500.3 7.9 Other non-cash items ...... (63.2) 4,047.2 (4,110.4) Working capital ...... 61.6 121.0 (59.4) $ 525.8 $ 936.6 $ (410.8)
Net cash provided by operating activities decreased due to a combination of poor operating results after adjusting for non-cash items and a decrease in cash provided from working capital changes in 2003 compared to 2002.
Years ended December 31, 2003 2002 Change (In millions) Net Cash Used in Investing Activities Capital expenditures...... $ (495.9) $(141.0) $ (354.9) Proceeds from disposal of assets ...... 8.4 88.3 (79.9) DDII LLC’s cash acquired, net of cash paid ...... 18.1 − 18.1 DD LLC’s cash acquired...... 18.6 − 18.6 Other, net...... 3.3 7.4 (4.1) $ (447.5) $ (45.3) $ (402.2)
Net cash used in investing activities increased for the year ended December 31, 2003 as compared to the prior year due to an increase in capital expenditures resulting primarily from the acquisition of the Deepwater Frontier and Deepwater Pathfinder totaling $382.8 million (see “Capital Expenditures”) and lower proceeds from disposal of assets, partially offset by $36.7 million of cash acquired upon acquisition of ConocoPhillips’ interests in DD LLC and DDII LLC.
Years ended December 31, 2003 2002 Change (In millions) Net Cash Used in Financing Activities Net repayments under commercial paper program...... $ – $ (326.4) $ 326.4 Borrowings from issuance of debt...... 2.1 − 2.1 Borrowings under credit facility agreement ...... 250.0 − 250.0 Cash received from termination of interest rate swaps...... 173.5 − 173.5 Repayments on other debt instruments...... (1,252.7) (189.3) (1,063.4) Other, net...... 8.6 (14.8) 23.4 $ (818.5) $ (530.5) $ (288.0)
Net cash used in financing activities increased in 2003 compared to 2002 primarily due to higher debt repayments, which included the repurchase of debt put to us during the year and early debt retirements. Partially offsetting the cash paid for debt retirements were cash received from the termination of interest rate swaps (see “—Derivative Instruments”) and borrowings under our revolving credit facility to partially fund the payoff of synthetic lease financing facilities (see “— Acquisitions and Dispositions”). Also in 2002 we discontinued the payment of quarterly dividends after the second quarter dividend payment.
A-27 Capital Expenditures
Capital expenditures totaled $495.9 million during the year ended December 31, 2003 and included our acquisition of two fifth-generation deepwater rigs, the Deepwater Pathfinder and Deepwater Frontier, through the payoff of synthetic lease financing arrangements totaling $382.8 million (see “—Acquisitions and Dispositions”). The remaining $113.1 million related to capital expenditures for existing fleet and corporate infrastructure. A substantial majority of our capital expenditures in 2003 related to the Transocean Drilling segment.
During 2004, we expect to spend less than $100 million on our existing fleet, corporate infrastructure and major upgrades, excluding those upgrades required and funded by our drilling contracts, although this amount is dependent upon the actual level of operational and contracting activity. A substantial majority of our expected capital expenditures in 2004 relates to our Transocean Drilling segment. We intend to fund the cash requirements relating to our capital expenditures through available cash balances, cash generated from operations and asset sales. We also have available credit under our revolving credit agreements (see “—Sources of Liquidity”) and may engage in other commercial bank or capital market financings.
Acquisitions and Dispositions
From time to time, we review possible acquisitions of businesses and drilling units and may in the future make significant capital commitments for such purposes. Any such acquisition could involve the payment by us of a substantial amount of cash or the issuance of a substantial number of additional ordinary shares or other securities. We would likely fund the cash portion of any such acquisition through cash balances on hand, the incurrence of additional debt, sales of assets, ordinary shares or other securities or a combination thereof. In addition, from time to time, we review possible dispositions of drilling units.
Acquisitions—As a result of the R&B Falcon merger, we had ownership interests in two unconsolidated joint ventures, 50 percent in DD LLC, and 60 percent in DDII LLC. Subsidiaries of ConocoPhillips owned the remaining interests in these joint ventures. Each of the joint ventures was a lessee in a synthetic lease financing facility entered into in connection with the construction of the Deepwater Pathfinder, in the case of DD LLC, and the Deepwater Frontier, in the case of DDII LLC. Pursuant to the lease financings, the rigs were owned by special purpose entities and leased to the joint ventures.
In May 2003, WestLB AG, one of the lenders in the Deepwater Frontier synthetic lease financing facility, assigned its $46.1 million remaining promissory note receivable to us in exchange for cash of $46.1 million. Also in May 2003, but subsequent to the WestLB AG assignment, we purchased ConocoPhillips’ 40 percent interest in DDII LLC for approximately $5.0 million. As a result of this purchase, we consolidated DDII LLC late in the second quarter of 2003. In addition, we acquired certain drilling and other contracts from ConocoPhillips for approximately $9.0 million in cash. In December 2003, DDII LLC prepaid the remaining $197.5 million debt and equity principal amounts owed, plus accrued and unpaid interest, to us and other lenders under the synthetic lease financing facility. As a result of this prepayment, DDII LLC became the legal owner of the Deepwater Frontier.
In November 2003, we purchased the remaining 25 percent minority interest in the Caspian Sea Ventures International Limited (“CSVI”) joint venture. CSVI owns the jackup rig Trident 20 and is now a wholly owned subsidiary.
In December 2003, we purchased ConocoPhillips’ 50 percent interest in DD LLC in connection with the payoff of the Deepwater Pathfinder synthetic lease financing facility. As a result of this purchase, we consolidated DD LLC late in the fourth quarter of 2003. Concurrent with the purchase of this ownership interest, DD LLC prepaid the remaining $185.3 million debt and equity principal amounts owed, plus accrued and unpaid interest, to the lenders under the synthetic lease financing facility. As a result of this prepayment, DD LLC became the legal owner of the Deepwater Pathfinder.
Dispositions—In January 2003, we completed the sale of the RBF 160 to a third party for net proceeds of $13.1 million and recognized a net after-tax gain on sale of $0.2 million. The proceeds were received in December 2002 and were reflected as deferred income and proceeds from asset sales in the consolidated balance sheet and consolidated statement of cash flows, respectively.
In February 2004, we completed the IPO of TODCO. See “—Significant Events.”
Sources of Liquidity
Our primary sources of liquidity in 2003 were our cash flows from operations, existing cash balances, borrowings on our $800 million, five-year revolving credit agreement and proceeds from the termination of our interest rate swaps. The primary uses of cash were debt repayment and capital expenditures. At December 31, 2003, we had $474.0 million in cash and cash equivalents.
A-28 We expect to rely primarily upon existing cash balances and internally generated cash flows to maintain liquidity in 2004, as cash flows from operations are expected to be positive and, together with existing cash balances, adequate to fulfill anticipated obligations such as scheduled debt maturities, capital expenditures and working capital needs. From time to time, we may also use bank lines of credit to maintain liquidity for short-term cash needs.
Excluding the acquisition of the Deepwater Pathfinder and Deepwater Frontier (see “—Capital Expenditures”), we have significantly reduced our capital expenditures compared to prior years due to the completion of our newbuild program in 2001 and ongoing efforts to contain capital expenditures. We expect capital expenditures for the fleet to be less than $100 million in 2004.
When cash on hand, cash flows from operations, proceeds from asset sales, including the TODCO IPO, and committed bank facility availability exceed our expected liquidity needs, we may use a portion of such cash to reduce debt prior to scheduled maturity through repurchases, redemptions or tender offers, or make repayments on bank borrowings.
In February 2004, we announced the redemption of the 9.5% Senior Notes due December 2008 at the make-whole premium price provided in the indenture, which does not effect the 9.5% Senior Notes due December 2008 of TODCO (see “—Outlook”). We expect to utilize existing cash balances, which includes proceeds from the TODCO IPO, to fund this redemption.
At December 31, 2003 and 2002, our total debt was $3,658.1 million and $4,678.0 million, respectively. During the year ended December 31, 2003, we reduced net debt, a non-GAAP financial measure defined as total debt less swap receivables and cash and cash equivalents, by $98.4 million. The components of net debt at carrying value were as follows (in millions):
December 31, 2003 2002 Total Debt...... $3,658.1 Less: Cash and cash equivalents...... (474.0) Swap receivables...... −
We believe net debt provides useful information regarding the level of our indebtedness by reflecting the amount of indebtedness assuming cash and investments are used to repay debt. Net debt has been reduced each year since 2001 due to the fact that cash flows, primarily from operations and asset sales, have been greater than that needed for capital expenditures.
Our internally generated cash flow is directly related to our business and the market sectors in which we operate. Should the drilling market deteriorate, or should we experience poor results in our operations, cash flow from operations may be reduced. However, we have continued to generate positive cash flow from operating activities over recent years.
We have access to a bank line of credit under an $800 million five-year revolving credit agreement expiring in December 2008. As of March 1, 2004, $600.0 million remained available under this credit line. Because our current cash balances and this revolving credit agreement provide us with adequate liquidity, we terminated our commercial paper program during the first quarter of 2004.
The bank credit line requires compliance with various covenants and provisions customary for agreements of this nature, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest coverage ratio and debt to tangible capital ratio, both as defined by the credit agreement, of not less than three to one and not greater than 50 percent, respectively. Other provisions of the credit agreement includes limitations on creating liens, incurring debt, transactions with affiliates, sale/leaseback transactions and mergers and sale of substantially all assets. Should we fail to comply with these covenants, we would be in default and may lose access to this facility. We are also subject to various covenants under the indentures pursuant to which our public debt was issued, including restrictions on creating liens, engaging in sale/leaseback transactions and engaging in merger, consolidation or reorganization transactions. A default under our public debt could trigger a default under our credit line and cause us to lose access to this facility.
In April 2001, the Securities and Exchange Commission (“SEC”) declared effective our shelf registration statement on Form S–3 for the proposed offering from time to time of up to $2.0 billion in gross proceeds of senior or subordinated debt securities, preference shares, ordinary shares and warrants to purchase debt securities, preference shares, ordinary shares or other securities. At February 28, 2004, $1.6 billion in gross proceeds of securities remained unissued under the shelf registration statement.
A-29 Our access to debt and equity markets may be reduced or closed to us due to a variety of events, including, among others, downgrades of ratings of our debt, industry conditions, general economic conditions, market conditions and market perceptions of us and our industry.
Our contractual obligations included in the table below are at face value (in millions).
For the years ending December 31, Total 2004 2005-2006 2007-2008 Thereafter Contractual Obligations Debt...... $3,485.1 $45.8 $770.3 $919.0 $1,750.0 Operating Leases...... 83.6 27.0 28.9 14.2 13.5 Total Obligations ...... $3,568.7 $72.8 $799.2 $933.2 $1,763.5
Bondholders may, at their option, require us to repurchase the 1.5% Convertible Debentures due 2021, the 7.45% Notes due 2027 and the Zero Coupon Convertible Debentures due 2020 in May 2006, April 2007 and May 2008, respectively. With regard to both series of the Convertible Debentures, we have the option to pay the repurchase price in cash, ordinary shares or any combination of cash and ordinary shares. The chart above assumes that the holders of these convertible debentures and notes exercise the options at the first available date. We are also required to repurchase the convertible debentures at the option of the holders at other later dates.
See “—Defined Benefit Pension Plans” for discussion of pension funding requirements.
At December 31, 2003, we had other commitments that we are contractually obligated to fulfill with cash should the obligations be called. These obligations include standby letters of credit and surety bonds that guarantee our performance as it relates to our drilling contracts, insurance, tax and other obligations in various jurisdictions. Letters of credit are issued under a number of facilities provided by several banks. The obligations that are the subject of these surety bonds are geographically concentrated in the United States and Brazil. These letters of credit and surety bond obligations are not normally called as we typically comply with the underlying performance requirement. The table below provides a list of these obligations in U.S. dollar equivalents and their time to expiration.
For the years ending December 31, Total 2004 2005-2006 2007-2008 Thereafter (In millions) Other Commercial Commitments Standby Letters of Credit ...... $186.2 $166.7 $ 10.3 $9.2 $− Surety Bonds ...... 169.5 66.2 103.2 0.1 − Total ...... $355.7 $232.9 $113.5 $9.3 $−
Derivative Instruments
We have established policies and procedures for derivative instruments that have been approved by our Board of Directors. These policies and procedures provide for the prior approval of derivative instruments by our Chief Financial Officer. From time to time, we may enter into a variety of derivative financial instruments in connection with the management of our exposure to fluctuations in foreign exchange rates and interest rates. We do not enter into derivative transactions for speculative purposes; however, for accounting purposes, certain transactions may not meet the criteria for hedge accounting.
Gains and losses on foreign exchange derivative instruments that qualify as accounting hedges are deferred as accumulated other comprehensive income and recognized when the underlying foreign exchange exposure is realized. Gains and losses on foreign exchange derivative instruments that do not qualify as hedges for accounting purposes are recognized currently based on the change in market value of the derivative instruments. At December 31, 2003, we had no material open foreign exchange derivative instruments.
From time to time, we may use interest rate swaps to manage the effect of interest rate changes on future income. Interest rate swaps are designated as a hedge of underlying future interest payments. The interest rate differential to be received or paid under the swaps is recognized over the lives of the swaps as an adjustment to interest expense. If an interest rate swap is terminated, the gain or loss is amortized over the life of the underlying debt.
A-30 In June 2001, we entered into $700 million aggregate notional amount of interest rate swaps as a fair value hedge against our 6.625% Notes due April 2011. In February 2002, we entered into $900 million aggregate notional amount of interest rate swaps as a fair value hedge against our 6.75% Senior Notes due April 2005, 6.95% Senior Notes due April 2008 and 9.5% Senior Notes due December 2008. The swaps effectively converted the fixed interest rate on each of the four series of notes into a floating rate. The market value of the swaps was carried as an asset or a liability in our consolidated balance sheet and the carrying value of the hedged debt was adjusted accordingly.
In January 2003, we terminated the swaps with respect to our 6.75% Senior Notes due April 2005, 6.95% Senior Notes due April 2008 and 9.5% Senior Notes due December 2008. In March 2003, we terminated the swaps with respect to our 6.625% Notes due April 2011. As a result of these terminations, we received cash proceeds, net of accrued interest, of approximately $173.5 million that was recognized as a fair value adjustment to long-term debt in our consolidated balance sheet and is being amortized as a reduction to interest expense over the life of the underlying debt. Such reduction amounted to approximately $23.1 million in 2003 and is expected to be approximately $27.2 million in 2004.
Historical 2003 compared to 2002
Following is an analysis of our Transocean Drilling segment and TODCO segment operating results, as well as an analysis of income and expense categories that we have not allocated to our two segments.
Transocean Drilling Segment
Years ended December 31, 2003 2002 Change % Change (In millions, except day amounts and percentages)
Operating days (a) ...... 23,712 26,315 (2,603) (10)% Utilization (a) (b) (d) ...... 69% 78% N/A (12)% Average dayrate (a) (c) (d) ...... $89,400 $ 93,500 $ (4,100) (4)%
Contract drilling revenues ...... $ 2,124.0 $ 2,486.1 $ (362.1) (15)% Client reimbursable revenues ...... 82.7 − 82.7 N/M 2,206.7 2,486.1 (279.4) (11)% Operating and maintenance expense ...... 1,367.9 1,291.3 76.6 6% Depreciation ...... 416.0 408.4 7.6 2% Impairment loss on long-lived assets and goodwill...... 5.2 2,528.1 (2,522.9) N/M Gain from sale of assets, net...... (4.9) (2.7) (2.2) 81% Operating income (loss) before general and administrative expense ...... $ 422.5 $(1,739.0) $2,161.5 124% ______“N/A” means not applicable “N/M” means not meaningful
(a) Applicable to all rigs. (b) Utilization is defined as the total actual number of revenue earning days as a percentage of total number of calendar days in the period. (c) Average dayrate is defined as contract drilling revenue earned per revenue earning day. (d) Effective January 1, 2003, the calculation of average dayrates and utilization was changed to include all rigs based on contract drilling revenues. Prior periods have been restated to reflect the change.
Due to a general deterioration in market conditions, average dayrates and utilization declined resulting in a decrease in this segment’s contract drilling revenues of approximately $339.0 million, excluding the impact of the items discussed separately below. Contract drilling revenues were also adversely impacted by approximately $37.0 million due to the labor strike in Nigeria, the riser separation incident on the Discoverer Enterprise and the electrical fire on the Peregrine I. Additional decreases of $29.1 million resulted from rigs sold, returned to owner and transferred from this segment to the TODCO segment and the favorable settlement of a contract dispute during 2002. These decreases were partially offset by increases in contract drilling revenue of $45.2 million from a rig transferred into this segment from the TODCO segment
A-31 during the second quarter of 2002 and from the Deepwater Frontier as a result of the consolidation of DDII LLC late in the second quarter of 2003. See “—Significant Events.”
Operating revenues for 2003 included $82.7 million related to costs incurred and billed to customers on a reimbursable basis. See “—Overview.”
The increase in this segment’s operating and maintenance expense was primarily due to the recognition of approximately $83.0 million in client reimbursable costs as operating and maintenance expense as a result of implementing EITF 99-19 in 2003 (see “—Overview”). In addition, expenses increased approximately $89.9 million due to costs associated with the riser separation incident on the Discoverer Enterprise, the consolidation of DDII LLC, which leased the Deepwater Frontier, the restructuring of the Nigeria defined benefit plan, costs related to the electrical fire on the Peregrine I and the transfer of a jackup rig into this segment from the TODCO segment during the second quarter of 2002 (see “—Significant Events”). Partially offsetting these increases were decreased operating and maintenance expenses of approximately $51.0 million resulting from lower activity, implementation of standardized purchasing through negotiated agreements, nationalization of our labor force in certain operating locations and headcount reductions in support groups. Operating and maintenance expenses were further reduced by $44.0 million relating to rigs sold, returned to owner or removed from drilling service during and subsequent to 2002, the settlements of a dispute and an insurance claim as well as a reduction in our insurance program expense during 2003 and costs incurred in 2002 associated with restructuring charges and a litigation provision with no comparable activity in 2003.
The increase in this segment’s depreciation expense resulted primarily from $9.1 million of additional depreciation on capital upgrades, the transfer of a rig from the TODCO segment into this segment and depreciation expense related to assets reclassified from held for sale to our active fleet during 2002 because they no longer met the criteria for assets held for sale under SFAS 144. These increases were partially offset by lower depreciation expense of $2.8 million following the sale of rigs classified as held and used during and subsequent to 2002.
The decrease in impairment loss in this segment is primarily due to the recognition of a $2,494.1 million goodwill impairment charge that resulted from our annual impairment test of goodwill conducted as of October 1, 2002 with no comparable charge in 2003. The impairment charge recorded in 2003 resulted from the removal of two drilling units from our active fleet. In 2002, we also recorded $28.5 million of non-cash impairment charges in this segment primarily related to assets reclassified from held for sale to our active fleet because they no longer met the held for sale criteria under SFAS 144.
During 2003, this segment recognized net pre-tax gains of $4.9 million related to the sale of the RBF 160, the Searex 15, the settlement of an insurance claim and the sale of other assets. During 2002, this segment recognized net pre-tax gains of $5.5 million related to the sale of the Transocean 96, Transocean 97 and a mobile offshore production unit, the partial settlement of an insurance claim and the sale of other assets, which were partially offset by net pre-tax losses of $2.8 million from the sale of the RBF 209 and an office building.
TODCO Segment Years ended December 31, 2003 2002 Change % Change (In millions, except day amounts and percentages)
Operating days (a) ...... 10,953 9,101 1,852 20% Utilization (a) (b) (d) ...... 4 34% N/A 21% Average dayrate (a) (c) (d) ...... $ 19,200 $ 20,600 $(1,400) (7)%
Contract drilling revenues ...... $ 209.8 $ 187.8 $ 22.0 12% Client reimbursable revenues ...... 17.8 − 17.8 N/M 227.6 187.8 39.8 21% Operating and maintenance expense ...... 242.5 202.9 39.6 20% Depreciation ...... 92.2 91.9 0.3 N/M Impairment loss on long-lived assets and goodwill...... 11.3 399.3 (388.0) N/M Gain from sale of assets, net...... (0.9) (1.0) 0.1 (10)% Operating loss before general and administrative expense..... $ (117.5) $ (505.3) $387.8 77% ______“N/A” means not applicable
A-32 “N/M” means not meaningful
(a) Applicable to all rigs. (b) Utilization is defined as the total actual number of revenue earning days as a percentage of total number of calendar days in the period. (c) Average dayrate is defined as contract drilling revenue earned per revenue earning day. (d) Effective January 1, 2003, the calculation of average dayrates and utilization was changed to include all rigs based on contract drilling revenues. Prior periods have been restated to reflect the change.
Higher utilization in 2003 resulted in an increase in this segment’s contract drilling revenue of $42.9 million, partially offset by a decrease of $21.7 million due to lower average dayrates.
Operating revenues for 2003 included $17.8 million related to costs incurred and billed to customers on a reimbursable basis. See “—Overview.”
A large portion of our operating and maintenance expense consists of employee-related costs and is fixed or only semi-variable. Accordingly, operating and maintenance expense does not vary in direct proportion to activity or dayrates.
The increase in this segment’s operating and maintenance expense was due primarily to approximately $18.0 million in client reimbursable costs as operating and maintenance expense as a result of implementing EITF 99-19 during 2003 (see “—Overview”). In addition, expenses increased due to an increase in activity of approximately $14.0 million in 2003, costs of approximately $11.0 million associated with the well control incident on inland barge Rig 62 and the fire incident on inland barge Rig 20 (see “―Significant Events”), as well as approximately $7.4 million related to a write-down of other receivables, an insurance claim provision and the consolidation of a joint venture that owns two land rigs during the third quarter of 2002. These increases were partially offset by approximately $10.9 million of reduced expense relating to our insurance program in 2003 compared to the same period in 2002, the release of a provision for doubtful accounts receivable during 2003 upon collection of amounts previously reserved, lower expenses resulting from the transfer of a jackup rig from this segment into the Transocean Drilling segment during the second quarter of 2002 and severance-related costs, other restructuring charges and compensation-related expenses incurred in 2002 with no comparable activity in 2003.
The decrease in impairment loss in this segment is primarily due to the recognition of a $381.9 million non-cash goodwill impairment charge that resulted from our annual impairment test of goodwill conducted as of October 1, 2002 with no comparable charge in 2003. Our 2003 impairment charges resulted primarily from our decision to take five jackup rigs out of drilling service and market the rigs for alternative uses. In 2002, we recorded non-cash impairment charges in this segment of $17.4 million primarily related to assets reclassified from held for sale to our active fleet because they no longer met the held for sale criteria under SFAS 144.
Total Company Results of Operations
Years ended December 31, 2003 2002 Change % Change (In millions, except % change)
General and Administrative Expense...... $ 65.3 $ 65.6 $ (0.3) N/M Other (Income) Expense, net Equity in earnings of joint ventures ...... (5.1) (7.8) 2.7 (35)% Interest income...... (18.8) (25.6) 6.8 (26)% Interest expense, net of amounts capitalized...... 202.0 212.0 (10.0) (5)% Loss on retirement of debt ...... 15.7 − 15.7 N/M Impairment loss on note receivable from related party...... 21.3 − 21.3 N/M Other, net ...... 3.0 0.3 2.7 N/M Income Tax Expense (Benefit)...... 3.0 (123.0) 126.0 N/M Cumulative Effect of Changes in Accounting Principles...... (0.8) 1,363.7 (1,364.5) N/M ______“N/M” means not meaningful
A-33 The decrease in general and administrative expense was primarily attributable to $9.0 million of costs related to the exchange of our newly issued notes for TODCO’s notes in March 2002 as more fully described in Note 8 to our consolidated financial statements and reduced expense related to employee benefits for 2003. Offsetting these decreases was $8.8 million in expenses relating to the IPO of TODCO in 2003, of which $3.1 million was incurred and deferred in 2002.
Equity in earnings of joint ventures decreased approximately $3.8 million primarily related to TODCO’s 25 percent share of losses from Delta Towing, which included TODCO’s share of non-cash impairment charges on the carrying value of Delta Towing’s fleet and a decrease in our 50 percent share of earnings from Overseas Drilling Limited (“ODL”), which owns the drillship Joides Resolution, as the rig came off contract in the third quarter of 2003. Offsetting these decreases was an increase in equity in earnings of $1.6 million related to our 50 percent share of earnings of DD LLC, which leased the Deepwater Pathfinder, as a result of the rig’s increased utilization and average dayrates in 2003 compared to the same period in 2002.
The decrease in interest income was primarily due to a decrease of $3.2 million in interest earned on the notes receivable from Delta Towing due largely to the establishment of a reserve in the third quarter of 2003 resulting from Delta Towing’s failure to make scheduled quarterly interest payments (see “—Related Party Transactions”). Also contributing to the decrease was lower average cash balances for 2003 compared to 2002 primarily due to the utilization of cash for debt reduction and capital expenditures.
The decrease in interest expense was attributable to reductions in interest expense of $29.7 million associated with debt that was refinanced, repaid or retired during and subsequent to 2002. We also received a refund of interest in 2003 from a taxing authority compared to an interest payment in 2002 resulting in a reduction in interest expense of $2.1 million. Partially offsetting these decreases was the termination of our fixed to floating interest rate swaps in the first quarter of 2003, which resulted in a net increase in interest expense of $22.2 million (see “—Derivative Instruments”).
During 2003, we recognized a $15.7 million loss on early retirements of $888.6 million face value debt.
During 2003, we recognized a $21.3 million impairment loss on our note receivable from Delta Towing (see “―Related Party Transactions”).
We recognized a $3.5 million loss in other, net relating to the effect of foreign currency exchange rate changes on our monetary assets and liabilities primarily those denominated in Venezuelan bolivars (see “—Item 7A. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk”), partially offset by the favorable effect of foreign currency exchange rate changes on a U.K. pound denominated escrow deposit.
We operate internationally and provide for income taxes based on the tax laws and rates in the countries in which we operate and earn income. There is no expected relationship between the provision for income taxes and income before income taxes. The year ended December 31, 2003 included a tax benefit of $14.6 million attributable to the favorable resolution of a non-U.S. income tax liability, partially offset by an increase in our estimated annual effective tax rate to approximately 30 percent on earnings before non-cash note receivable and other asset impairments, loss on debt retirements, IPO-related costs and Nigeria benefit plan restructuring costs compared to our effective tax rate of approximately 14 percent for 2002. The year ended December 31, 2002 included a non-U.S. tax benefit of $175.7 million attributable to the restructuring of certain non- U.S. operations.
During 2003, we recognized a $0.8 million gain as a cumulative effect of a change in accounting principle related to TODCO’s consolidation of Delta Towing at December 31, 2003 as a result of the early adoption of the FIN 46 (see “—New Accounting Pronouncements”). During 2002, we recognized a $1,363.7 million goodwill impairment charge in our TODCO reporting unit as a cumulative effect of a change in accounting principle related to the implementation of SFAS 142.
Historical 2002 compared to 2001
On January 31, 2001, we completed the R&B Falcon merger with R&B Falcon Corporation. At the time of the merger, R&B Falcon owned, had partial ownership interests in, operated or had under construction more than 100 mobile offshore drilling units and other units utilized in the support of offshore drilling activities. As a result of the merger, R&B Falcon became our indirect wholly owned subsidiary and subsequently changed its name to TODCO. The merger was accounted for as a purchase and we were the accounting acquiror. The consolidated statements of operations and cash flows for the year ended December 31, 2001 include eleven months of operating results and cash flows for the merged company.
Although our 2002 results of operations include a full year of operations from the assets acquired in the R&B Falcon merger compared to 11 months in 2001, our revenues and operating and maintenance expense decreased in 2002 by $146.2 million and $109.1 million, respectively. These decreases were mainly attributable to a decline in overall market conditions
A-34 and resulted from a general uncertainty over world economic and political events. While our overall average fleet dayrate increased from $60,600 in 2001 to $74,800 in 2002, the resulting increase in revenues was more than offset by a substantial decrease in utilization, which was 74% in 2001 compared to 59% in 2002. Our 2002 financial results included the recognition of a number of non-cash charges pertaining substantially to goodwill impairments.
Following is an analysis of our Transocean Drilling segment and TODCO segment operating results, as well as an analysis of income and expense categories that we have not allocated to our two segments.
Transocean Drilling Segment
Years ended December 31, 2002 2001 Change % Change (In millions, except day amounts and percentages)
Operating days (a)...... 26,315 28,294 (1,979) (7)% Utilization (a) (b) (d)...... 78% 81% N/A (4)% Average dayrate (a) (c) (d)...... $ 93,500 $ 81,900 $ 11,600 14%
Contract drilling revenues...... $ 2,486.1 $2,385.2 $ 100.9 4% Operating and maintenance expense...... 1,291.3 1,326.7 (35.4) (3)% Depreciation...... 408.4 373.5 34.9 9% Goodwill amortization ...... − 114.2 (114.2) N/M Impairment loss on long-lived assets and goodwill ...... 2,528.1 39.4 2,488.7 N/M Gain from sale of assets, net ...... (2.7) (50.7) 48.0 (95)% Operating income (loss) before general and administrative expense...... $(1,739.0) $ 582.1 $(2,321.1) (399)% ______“N/A” means not applicable “N/M” means not meaningful
(a) Applicable all rigs. (b) Utilization is defined as the total actual number of revenue earning days as a percentage of the total number of calendar days in the period. (c) Average dayrate is defined as contract drilling revenue earned per revenue earning day. (d) Effective January 1, 2003, the calculation of average dayrates and utilization was changed to include all rigs based on contract drilling revenues. Prior periods have been restated to reflect the change.
The increase in this segment’s operating revenues resulted from a $97.6 million increase from assets acquired in the R&B Falcon merger representing a full year of revenues in 2002 compared to 11 months of operations in 2001, a $122.6 million increase from four newbuild drilling units placed into service during 2001 and a $36.4 million increase from three rigs transferred into this segment from the TODCO segment late in 2001 and mid-2002. In addition, operating revenues relating to historical Transocean assets totaled $1.5 billion for 2002, representing a $32.9 million, or two percent, increase over 2001. These increases were partially offset by a $33.5 million decrease related to the Deepwater Frontier following the expiration of our lease with a related party late in 2001, a $32.5 million decrease from four leased rigs returned to their owners, a $23.9 million decrease related to two rigs removed from our active fleet and marketed for sale and a $20.4 million decrease related to rigs sold during 2001 and 2002. Revenues also decreased by approximately $29.5 million for 2002 compared to 2001, as a result of the sale of RBF FPSO L.P., which owned the Seillean. A decrease of $38.2 million resulting from the winding up of our turnkey drilling business early in 2001 and loss of hire proceeds of $10.7 million in 2001 for the Jack Bates was partially offset by a favorable settlement of a contract dispute in 2002.
The decrease in this segment’s operating and maintenance expense resulted from a decrease of $40.5 million related to the Deepwater Frontier following the expiration of our lease with a related party late in 2001, a $22.7 million decrease related to four leased rigs returned to their owners, a $13.6 million decrease related to two rigs removed from our active fleet and marketed for sale, a $9.8 million decrease related to rigs sold during 2001 and 2002, a decrease of $5.1 million related to legal disputes and a $10.1 million decrease primarily related to a reduction in rig utilization, which resulted in certain rigs becoming idle with a reduced crew complement. Operating and maintenance expense also decreased $5.5 million during 2002 for two newbuilds placed into service during 2001. The decrease resulted from additional startup costs incurred during 2001 with no comparable costs in 2002. In addition, operating and maintenance expense in this segment decreased $39.9
A-35 million as a result of the winding up of our turnkey drilling business in 2001. These decreases were partially offset by an increase of $35.7 million in operating and maintenance expenses from assets acquired in the R&B Falcon merger for the full year ended 2002 compared to 11 months of activity in 2001, an increase of $21.6 million resulting from the activation of two newbuild drilling units during 2001 and an increase of $22.6 million resulting from three jackup rigs transferred into this segment from the TODCO segment in late 2001 and mid-2002. In addition, accelerated amortization of deferred gain on the Pride North Atlantic’s (formerly, the Drill Star) during 2001 produced incremental gains for 2001 of $36.6 million with no equivalent expense reduction during 2002.
The increase in this segment’s depreciation expense resulted primarily from four newbuild drilling units placed into service during 2001 ($17.5 million), the transfer of three jackup rigs into this segment from the TODCO segment ($13.3 million) and a full year of depreciation in 2002 on rigs acquired in the R&B Falcon merger compared to 11 months in 2001 ($18.8 million). These increases were partially offset by lower depreciation expense of approximately $16.7 million following the suspension of depreciation on certain rigs transferred to assets held for sale, the sale of various rigs classified as assets held and used during 2001 and an asset classified as held for sale in 2002 that was subsequently transferred to the TODCO segment.
The absence of goodwill amortization in 2002 resulted from our adoption of SFAS 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill is no longer amortized but is reviewed for impairment at least annually.
The increase in impairment loss in this segment resulted primarily from our annual impairment test of goodwill conducted as of October 1, 2002 ($2,494.1 million). In addition, we recorded non-cash impairment charges in this segment of $34.0 million in 2002, representing a decrease of $5.4 million over 2001, primarily related to assets reclassified from held for sale to our active fleet ($28.5 million) because they no longer met the held for sale criteria under SFAS 144.
During 2002, this segment recognized net pre-tax gains of $5.5 million related to the sale of the Transocean 96, Transocean 97, a mobile offshore production unit, the partial settlement of an insurance claim and the sale of other assets. These net gains were partially offset by net pre-tax losses of $2.8 million from the sale of the RBF 209 and an office building. During 2001, this segment recognized net pre-tax gains of $26.3 million related to the sale of RBF FPSO L.P., which owned the Seillean, $18.5 million related to the accelerated amortization of the deferred gain on the sale of the Sedco Explorer, $3.7 million related to the sale of two Nigerian-based land rigs and $2.2 million from the sale of other assets.
TODCO Segment Years ended December 31, 2002 2001 Change % Change (In millions, except day amounts and percentages)
Operating days (a)...... 9,101 16,375 (7,274) (44)% Utilization (a) (b) (d)...... 34% 63% N/A (47)% Average dayrate (a) (c) (d)...... $ 20,600 $26,900 $(6,300) (23)%
Contract drilling revenues...... $ 187.8 $ 434.9 $(247.1) (57)% Operating and maintenance expense...... 202.9 276.6 (73.7) (27)% Depreciation...... 91.9 96.6 (4.7) (5)% Goodwill amortization ...... − 40.7 (40.7) N/M Impairment loss on long-lived assets and goodwill ...... 399.3 1.0 398.3 N/M Gain from sale of assets, net ...... (1.0) (5.8) 4.8 (83)% Operating income (loss) before general and administrative expense...... $ (505.3) $ 25.8 $(531.1) (2,059)% ______“N/A” means not applicable “N/M” means not meaningful
(a) Applicable to all rigs. (b) Utilization is defined as the total actual number of revenue earning days as a percentage of the total number of calendar days in the period. (c) Average dayrate is defined as contract drilling revenue earned per revenue earning day. (d) Effective January 1, 2003, the calculation of average dayrates and utilization was changed to include all rigs based on contract drilling revenues. Prior periods have been restated to reflect the change.
A-36 Although this segment’s operating revenues represent a full year of operations in 2002 compared to 11 months of operations in 2001, revenues decreased mainly due to the further weakening of the Gulf of Mexico shallow and inland water market segment, a decline that began in mid-2001. In addition, the transfer of three jackup rigs from this segment into the Transocean Drilling segment resulted in a $23.7 million decrease. Excluding these three jackup rigs, decreased utilization and average dayrates resulted in a decrease in this segment’s contract drilling revenues of $223.4 million.
A large portion of our operating and maintenance expense consists of employee-related costs and is fixed or only semi-variable. Accordingly, operating and maintenance expense does not vary in direct proportion to activity or dayrates.
Although this segment’s operating and maintenance expense represents a full year of operations in 2002 compared to 11 months of operations in 2001, operating and maintenance expense in this segment decreased primarily from the further weakening of the Gulf of Mexico shallow and inland water market segment, which resulted in additional idle rigs during 2002. The additional idle rigs resulted in a $39.5 million decrease in personnel related expenses related to reduced employee count, a $15.3 million reduction of repair and maintenance costs, a $4.7 million decrease in leased rigs and other equipment rental expense and a $6.1 million decrease in insurance expense due in part to the additional idle rigs and related reduction in employee headcount. In addition, three jackup rigs were transferred out of this segment into the Transocean Drilling segment in late 2001 and mid-2002 and resulted in a decrease of $15.4 million in operating and maintenance expense. These decreases were partially offset by an increase in expenses of $4.4 million resulting from severance-related costs and other restructuring charges related to our decision to close an administrative office and warehouse in Louisiana and relocate most of the operations and administrative functions previously conducted at that location, as well as compensation-related expenses resulting from executive management changes in the third quarter of 2002.
The decrease in this segment’s depreciation expense resulted primarily from the transfer of three jackup rigs out of this segment into the Transocean Drilling segment ($12.2 million) and suspension of depreciation on rigs sold, scrapped or classified as held for sale during 2002 ($2.6 million). These decreases were partially offset by increased expense due to a full year of depreciation in 2002 on rigs acquired in the R&B Falcon merger compared to 11 months in 2001 ($9.0 million).
The absence of goodwill amortization in 2002 resulted from our adoption of SFAS 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill is no longer amortized but is reviewed for impairment at least annually.
The increase in impairment loss in this segment resulted primarily from our annual impairment test of goodwill conducted as of October 1, 2002 ($381.9 million). In addition, we recorded non-cash impairment charges in this segment of $17.4 million in 2002, representing an increase of $16.4 million over 2001, primarily related to assets reclassified from held for sale to our active fleet because they no longer met the held for sale criteria under SFAS 144.
During 2002, this segment recognized net pre-tax gains of $2.4 million on the sale of a land rig and other assets partially offset by net pre-tax losses of $1.4 million related to the sale of two mobile offshore production units and a land rig. During 2001, this segment recognized net pre-tax gains of $2.1 million related to the disposal of an inland drilling barge and $3.7 million related to the sale of other assets.
A-37 Total Company Results of Operations
Years ended December 31, 2002 2001 Change % Change (In millions, except % change)
General and Administrative Expense...... $ 65.6 $ 57.9 $ 7.7 13% Other (Income) Expense, net Equity in earnings of joint ventures...... (7.8) (16.5) 8.7 (53)% Interest income ...... (25.6) (18.7) (6.9) 37% Interest expense, net of amounts capitalized ...... 212.0 223.9 (11.9) (5)% Loss on retirement of debt ...... − 28.8 (28.8) N/M Other, net...... 0.3 0.8 (0.5) (63)% Income Tax Expense (Benefit) ...... (123.0) 76.2 (199.2) N/M Cumulative Effect of a Change in Accounting Principle...... 1,363.7 − 1,363.7 N/M ______“N/M” means not meaningful
The increase in general and administrative expense was primarily attributable to $3.9 million of costs related to the exchange of our newly issued notes for TODCO’s notes in March 2002 (see “Liquidity and Capital ResourcesSources of Liquidity”). The results from 2001 included a $1.3 million reduction in expense related to the favorable settlement of an unemployment tax assessment with no corresponding reduction in 2002. In addition, expense increased due to the R&B Falcon merger and reflected additional costs to manage a larger, more complex organization for a full year in 2002 compared to 11 months in 2001.
The decrease in equity in earnings of joint ventures was primarily related to TODCO’s 25 percent share of losses from Delta Towing ($4.1 million) and to the reduced earnings attributable to our 60 percent share of the earnings of DDII LLC, which owns the Deepwater Frontier ($4.5 million), and our 50 percent share of DD LLC, which owns the Deepwater Pathfinder ($1.6 million). Both the Deepwater Frontier and the Deepwater Pathfinder experienced increased downtime and decreased utilization during 2002. These decreases were partially offset by losses recorded in February 2001 on the sale of the Drill Star and Sedco Explorer by a joint venture in which we own a 25 percent interest ($2.6 million) with no corresponding activity in 2002. The increase in interest income was primarily due to interest earned on higher average cash balances for 2002 compared to 2001. The decrease in interest expense was attributable to reductions in interest expense of $33.2 million associated with debt that was refinanced, repaid or retired during and subsequent to 2001 and a decrease in interest rates that resulted in a $9.0 million reduction on floating rate bank debt. Additionally, our fixed to floating interest rate swaps resulted in reduced interest expense of $39.6 million. Offsetting these decreases were $26.4 million of additional interest expense on debt issued during the second quarter of 2001, $8.6 million of interest expense on debt acquired in the R&B Falcon merger, which represents additional interest for the full year 2002 compared to 11 months in 2001, and the absence of capitalized interest in 2002 due to the completion of our newbuild projects in 2001 compared to $34.9 million of capitalized interest in 2001. The increase in other, net was due primarily to a loss on sale of securities during 2001 with no comparable activity in 2002.
During 2001, we recognized a $28.8 million loss related to the early retirement of $1,233.4 million face value debt.
We operate internationally and provide for income taxes based on the tax laws and rates in the countries in which we operate and earn income. There is no expected relationship between the provision for income taxes and income before income taxes as more fully described in Note 14 to our consolidated financial statements. The year ended December 31, 2002 included a non-U.S. tax benefit of $175.7 million attributable to the restructuring of certain non-U.S. operations.
During 2002, we recognized a $1,363.7 million goodwill impairment charge as a cumulative effect of a change in accounting principle in our TODCO reporting unit related to the implementation of SFAS 142.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. This discussion should be read in conjunction with disclosures included in the notes to our consolidated financial statements related to estimates, contingencies and new accounting pronouncements. Significant accounting policies
A-38 are discussed in Note 2 to our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, materials and supplies obsolescence, investments, property and equipment, intangible assets and goodwill, income taxes, financing operations, workers’ insurance, pensions and other postretirement and employment benefits and contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following are our most critical accounting policies. These policies require significant judgments and estimates used in the preparation of our consolidated financial statements. Management has discussed each of these critical accounting policies and estimates with the Audit Committee of the Board of Directors.
Allowance for doubtful accounts—We establish reserves for doubtful accounts on a case-by-case basis when we believe the required payment of specific amounts owed to us is unlikely to occur. We derive a majority of our revenue from services to international oil companies and government-owned or government-controlled oil companies. Our receivables are concentrated in certain oil-producing countries. We generally do not require collateral or other security to support client receivables. If the financial condition of our clients was to deteriorate or their access to freely convertible currency was restricted, resulting in impairment of their ability to make the required payments, additional allowances may be required.
Provision for income taxes—Our tax provision is based on expected taxable income, statutory rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws. Our effective tax rate is expected to fluctuate from year to year as our operations are conducted in different taxing jurisdictions and the amount of pre-tax income fluctuates. Currently payable income tax expense represents either nonresident withholding taxes or the liabilities expected to be reflected on our income tax returns for the current year while the net deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities as reported on the balance sheet.
We establish valuation allowances to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future. While we have considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowances, changes in these estimates and assumptions, as well as changes in tax laws could require us to adjust the valuation allowances for our deferred tax assets. These adjustments to the valuation allowance would impact our income tax provision in the period in which such adjustments are identified and recorded. See “—Historical 2003 compared to 2002.”
Goodwill impairment—We perform a test for impairment of our goodwill annually as of October 1 as prescribed by SFAS 142, Goodwill and Other Intangible Assets. Because our business is cyclical in nature, goodwill could be significantly impaired depending on when the assessment is performed in the business cycle. The fair value of our reporting units is based on a blend of estimated discounted cash flows, publicly traded company multiples and acquisition multiples. Estimated discounted cash flows are based on projected utilization and dayrates. Publicly traded company multiples and acquisition multiples are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to ours. Changes in the assumptions used in the fair value calculation could result in an estimated reporting unit fair value that is below the carrying value, which may give rise to an impairment of goodwill. In addition to the annual review, we also test for impairment should an event occur or circumstances change that may indicate a reduction in the fair value of a reporting unit below its carrying value.
Property and equipment—Our property and equipment represents more than 65 percent of our total assets. We determine the carrying value of these assets based on our property and equipment accounting policies, which incorporate our estimates, assumptions, and judgments relative to capitalized costs, useful lives and salvage values of our rigs. We review our property and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets or asset groups may be impaired or when reclassifications are made between property and equipment and assets held for sale as prescribed by SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets. Asset impairment evaluations are based on estimated undiscounted cash flows for the assets being evaluated. Our estimates, assumptions and judgments used in the application of our property and equipment accounting policies reflect both historical experience and expectations regarding future industry conditions and operations. Using different estimates, assumptions and judgments, especially those involving the useful lives of our rigs and expectations regarding future industry conditions and operations, could result in different carrying values of assets and results of operations.
Pension and other postretirement benefits—Our defined benefit pension and other postretirement benefit (retiree life insurance and medical benefits) obligations and the related benefit costs are accounted for in accordance with SFAS 87,
A-39 Employers’ Accounting for Pensions, and SFAS 106, Employers’ Accounting for Postretirement Benefits Other than Pensions. Pension and postretirement costs and obligations are actuarially determined and are affected by assumptions including expected return on plan assets, discount rates, compensation increases, employee turnover rates and health care cost trend rates. We evaluate our assumptions periodically and make adjustments to these assumptions and the recorded liabilities as necessary.
Two of the most critical assumptions are the expected long-term rate of return on plan assets and the assumed discount rate. We evaluate our assumptions regarding the estimated long-term rate of return on plan assets based on historical experience and future expectations on investment returns, which are calculated by our third party investment advisor utilizing the asset allocation classes held by the plan’s portfolios. We utilize the Moody’s Aa long-term corporate bond yield as a basis for determining the discount rate for a majority of our plans. Changes in these and other assumptions used in the actuarial computations could impact our projected benefit obligations, pension liabilities, pension expense and other comprehensive income. We base our determination of pension expense on a market-related valuation of assets that reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. See “—Defined Benefit Pension Plans.”
Contingent liabilities—We establish reserves for estimated loss contingencies when we believe a loss is probable and the amount of the loss can be reasonably estimated. Our contingent liability reserves relate primarily to litigation, personal injury claims and potential tax assessments. Revisions to contingent liability reserves are reflected in income in the period in which different facts or information become known or circumstances change that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. Should the outcome differ from our assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required.
Restructuring Charges
In September 2002, we committed to restructuring plans in France, Norway and in our TODCO segment. We established a liability of approximately $5.2 million for the estimated severance-related costs associated with the involuntary termination of 81 employees pursuant to these plans. The charge was reported as operating and maintenance expense in our consolidated statements of operations of which approximately $4.0 million and $1.2 million related to the Transocean Drilling segment and TODCO segment, respectively. Through December 31, 2003, approximately $4.6 million had been paid to 74 employees representing full or partial payments. In June 2003, we released the expected surplus liability of $0.3 million to operating and maintenance expense in the Transocean Drilling segment. Substantially all of the remaining liability is expected to be paid by the end of the first quarter in 2005.
Defined Benefit Pension Plans
We maintain a qualified defined benefit pension plan (the “Retirement Plan”) covering substantially all U.S. employees except for TODCO employees, and an unfunded plan (the “Supplemental Benefit Plan”) to provide certain eligible employees with benefits in excess of those allowed under the Retirement Plan. In conjunction with the R&B Falcon merger, we acquired three defined benefit pension plans, two funded and one unfunded (the “Frozen Plans”), that were frozen prior to the merger for which benefits no longer accrue but the pension obligations have not been fully paid out. We refer to the Retirement Plan, the Supplemental Benefit Plan and the Frozen Plans collectively as the U.S. Plans.
In addition, we provide several defined benefit plans, primarily group pension schemes with life insurance companies covering our Norway operations and two unfunded plans covering certain of our employees and former employees (the “Norway Plans”). Certain of the Norway plans are funded in part by employee contributions. Our contributions to the Norway Plans are determined primarily by the respective life insurance companies based on the terms of the plan. For the insurance-based plans, annual premium payments are considered to represent a reasonable approximation of the service costs of benefits earned during the period. We also have an unfunded defined benefit plan (the “Nigeria Plan”) that provides retirement and severance benefits for certain of our Nigerian employees. The defined benefit pension benefits we provide are comprised of the U.S. Plans, the Norway Plans and the Nigeria Plan (collectively the “Transocean Plans”).
A-40 Total Retirement Supplemental Frozen Subtotal- Norway Nigeria Transocean Plan Benefit Plan Plans U.S. Plans Plans Plan Plans (in millions) Accumulated Benefit Obligation At December 31, 2003 $ 101.4 $ 7.7 $102.2 $ 211.3 $ 30.2 $ – $ 241.5 At December 31, 2002 86.6 5.0 95.6 187.2 37.1 3.4 227.7
Projected Benefit Obligation At December 31, 2003 $ 138.1 $ 10.9 $102.2 $ 251.2 $ 44.2 $ 0.1 $ 295.5 At December 31, 2002 131.2 7.6 95.8 234.6 50.4 10.6 295.6
Fair Value of Plan Assets At December 31, 2003 $ 95.0 $ – $ 91.3 $ 186.3 $ 28.1 $ – $ 214.4 At December 31, 2002 80.9 – 79.6 160.5 28.0 – 188.5
Funded Status At December 31, 2003 $ (43.1) $ (10.9) $(10.9) $ (64.9) $(16.1) $ (0.1) $ (81.1) At December 31, 2002 (50.3) (7.6) (16.2) (74.1) (22.4) (10.6) (107.1)
Net Periodic Benefit Cost (Income) Year Ending December 31, 2003 $ 10.7 $ 1.6 $ (1.7) $ 10.6 $ (1.8) $ 13.0 $ 21.8 (a) Year Ending December 31, 2002 11.6 2.6 (3.7) 10.5 3.4 3.2 17.1 (a)
Change in Accumulated Other Comprehensive Income Year Ending December 31, 2003 $ (8.2) $ 1.3 $ (3.1) $ (10.0) $ – $ – $ (10.0) Year Ending December 31, 2002 8.2 – 37.5 45.7 – – 45.7
Employer Contributions Year Ending December 31, 2003 $ – $ 0.7 $ 0.4 $ 1.1 $ 3.8 $ 18.4 $ 23.3 Year Ending December 31, 2002 – 2.4 0.3 2.7 3.0 0.9 6.6
Weighted-Average Assumptions – Benefit Obligations Discount rate At December 31, 2003 6.00% 6.00% 6.00% 6.00 20.00 6.25% (b) At December 31, 2002 6.50% 6.50% 6.50% 6.00 20.00 6.90% (b) Rate of compensation increase At December 31, 2003 5.45% 5.45% – 3.50 15.00 5.24% (b) At December 31, 2002 5.50% 5.50% – 3.50 15.00 5.53% (b)
Weighted-Average Assumptions – Net Periodic Benefit Cost Discount rate At December 31, 2003 6.50% 6.50% 6.50% 6.00 20.00 6.65% (b) At December 31, 2002 7.00% 7.00% 7.00% 6.00 20.00 7.31% (b) Expected long-term rate of return on plan assets At December 31, 2003 9.00% – 9.00% 7.00 – 8.73% (c) At December 31, 2002 9.00% – 9.00% 7.00 – 8.73% (c) Rate of compensation increase At December 31, 2003 5.45% 5.45% – 3.50 15.00 5.24% (b) At December 31, 2002 5.50% 5.50% – 3.50 15.00 5.53% (b)
(a) Pension costs were reduced by expected returns on plan assets of $19.7 million and $20.7 million for the years ended December 31, 2003 and 2002, respectively. (b) Weighted-average based on relative average projected benefit obligation for the year. (c) Weighted-average based on relative average fair value of plan assets for the year.
For the funded U.S. Plans, our funding policy consists of reviewing the funded status of these plans annually and contributing an amount at least equal to the minimum contribution required under the Employee Retirement Income Security
A-41 Act of 1974 (ERISA). Employer contributions to the funded U.S. Plans are based on actuarial computations that establish the minimum contribution required under ERISA and the maximum deductible contribution for income tax purposes. No contributions were made to the funded U.S. Plans during 2003 or 2002. Contributions to the unfunded U.S. Plans in 2003 and 2002 were to fund benefit payments.
Plan assets of the funded Transocean Plans have been favorably impacted by a substantial rise in world equity markets during 2003 and an allocation of approximately 60 percent of plan assets to equity securities. Debt securities and other investments also experienced increased values, but to a lesser extent. During 2003, the market value of the investments in the Transocean Plans increased by $25.9 million, or 13.7 percent. The increase is due to net investment gains of $33.8 million, primarily in the funded U.S. Plans, resulting from the favorable performance of equity markets in 2003, partially offset by benefit plan payments of $7.8 million from these plans. We expect to contribute $10.0 million to the Transocean Plans in 2004, comprised of $5.4 million to the funded U.S. Plans, an estimated $2.0 million to fund expected benefit payments for the unfunded U.S. Plans and Nigeria Plan, and an estimated $2.6 million for the Norway Plans to fund expected benefit payments. We expect the required contributions will be funded from cash flow from operations. We have generated unrecognized net actuarial losses due to the effect of the unfavorable performance in previous years of the plan assets of the funded Transocean Plans. As of December 31, 2003 we had cumulative losses of approximately $11.7 million that remain to be recognized in the calculation of the market-related value of assets. These unrecognized net actuarial losses may result in increases in our future pension expense depending on several factors, including whether such losses at each measurement date exceed certain amounts in accordance with SFAS 87, Employers’ Accounting for Pensions.
We account for the Transocean Plans in accordance with SFAS 87. This statement requires us to calculate our pension expense and liabilities using assumptions based on a market-related valuation of assets, which reduces year-to-year volatility using actuarial assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions. In accordance with SFAS 87, changes in pension obligations and assets may not be immediately recognized as pension costs in the statement of operations but generally are recognized in future years over the remaining average service period of plan participants. As such, significant portions of pension costs recorded in any period may not reflect the actual level of benefit payments provided to plan participants.
Two of the most critical assumptions used in calculating our pension expense and liabilities are the expected long- term rate of return on plan assets and the assumed discount rate. During 2002, we recorded a non-cash minimum pension liability adjustment related to the U.S. Plans that resulted in a charge to other comprehensive income of $32.5 million, net of tax of $13.2 million. This charge was attributable primarily to the decline in the market value of the funded U.S. Plans’ assets and increased benefit obligations associated with a reduction in the discount rate that resulted in the value of the funded U.S. Plans’ assets being less than the accumulated benefit obligation. Increases in the fair value of plan assets in 2003 have resulted in a reduction in the minimum pension liability of $9.3 million, net of tax of $0.7 million. At December 31, 2003, the minimum pension liability included in other comprehensive income was $23.2 million, net of tax of $12.5 million. The minimum pension liability adjustments did not impact our results of operations during 2002 or 2003, nor did these adjustments affect our ability to meet any financial covenants related to our debt facilities.
Our expected long-term rate of return on plan assets for the funded U.S. Plans was 9.0 percent as of December 31, 2003 and 2002. The expected long-term rate of return on plan assets was developed by reviewing each plan's targeted asset allocation and asset class long-term rate of return expectations. We regularly review our actual asset allocation and periodically rebalance plan assets as appropriate. For the funded U.S. Plans, we discounted our future pension obligations using a rate of 6.0 percent at December 31, 2003, 6.5 percent at December 31, 2002 and 7.0 percent at December 31, 2001. We expect pension expense related to the Transocean Plans for 2004 to decrease by approximately $2.5 million based on the reduction in costs attributable to the Nigeria Plan resulting from the restructuring of this plan, partially offset by the change in the discount rate assumptions for the U.S. Plans.
For each percentage point the expected long-term rate of return assumption is lowered, pension expense would increase approximately $1.9 million. For each one-half percentage point the discount rate is lowered, pension expense would increase by approximately $3.3 million.
During 2003, we terminated all Nigerian employees, which resulted in the payment of all accrued benefits under the Nigeria Plan. Approximately 80 of these employees were made redundant during 2003, while the remaining employees not considered redundant were rehired under a new plan. In accordance with the provisions of SFAS 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits, this resulted in a partial plan curtailment and a plan settlement. We paid approximately $17.0 million in severance benefits under the Nigeria Plan during 2003 as a result of these events. In accordance with SFAS 88, we have accounted for these events as a plan restructuring and recorded a net settlement expense of $10.4 million, as well as a $4.6 million liability. This liability will reduce future pension
A-42 expense related to the Nigeria Plan as it will be recognized over the expected service term of the related employees. Pension expense for the Nigeria Plan is estimated to be $0.1 million in 2004 and represents a 94.6% decrease as compared to the 2003 plan expenses (excluding the settlement related expenses discussed above).
Future changes in plan asset returns, assumed discount rates and various other factors related to the pension plans will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.
Off-Balance Sheet Arrangements
Special Purpose Entities—DD LLC and DDII LLC were previously unconsolidated joint ventures in which we owned a 50 percent and 60 percent interest, respectively, and each was party to a synthetic lease financing facility. See “— Acquisitions and Dispositions.”
DD LLC's annual rent payments for the Deepwater Pathfinder, totaling approximately $28.2 million in 2003, were substantially fixed through October 2003 due to the interest rate swap (see “—Derivative Instruments”). Subsequent to the scheduled expiration of the interest rate swap, rent payments were subject to changes in market interest rates. DDII LLC's annual rent payments for the Deepwater Frontier were subject to changes in market interest rates and totaled approximately $23.8 million in 2003.
With the payoff of the synthetic lease financing arrangements in December 2003, our relationships with the special purpose entities were terminated.
Sale/Leaseback—We lease the M. G. Hulme, Jr. from Deep Sea Investors, L.L.C., a special purpose entity formed by several leasing companies to acquire the rig from one of our subsidiaries in November 1995 in a sale/leaseback transaction. We are obligated to pay rent of approximately $13 million per year through November 2005. At the termination of the lease, we may purchase the rig for a maximum amount of approximately $35.7 million. Effective September 2002, the lease neither requires that collateral be maintained nor contains any credit rating triggers.
Related Party Transactions
Delta Towing—In connection with the R&B Falcon merger, TODCO formed a joint venture to own and operate its U.S. inland marine support vessel business (the “Marine Business”). As part of the joint venture formation in January 2001, the Marine Business was transferred by a subsidiary of TODCO to Delta Towing in exchange for a 25 percent equity interest, and certain secured notes payable from Delta Towing in a principal amount of $144 million. These notes were valued at $80 million immediately prior to the closing of the R&B Falcon merger. In December 2001, the note agreement was amended to provide for a $4 million, three year-revolving credit facility (the “Delta Towing Revolver”). For the year ended December 31, 2003, TODCO recognized interest income of $3.1 million on the outstanding notes receivable and $0.3 million on the outstanding balance of the Delta Towing Revolver.
Delta Towing defaulted on the notes in January 2003 by failing to make its scheduled quarterly interest payment and remains in default as a result of its continued failure to make its quarterly interest payments. As a result of our continued evaluation of the collectibility of the notes, TODCO recorded a $21.3 million impairment of the notes in June 2003 based on Delta Towing’s discounted cash flows over the terms of the notes, which deteriorated in the second quarter of 2003 as a result of the continued decline in Delta Towing’s business outlook. As permitted in the notes in the event of default, TODCO began offsetting a portion of the amount owed to Delta Towing against the interest due under the notes. Additionally, TODCO established a reserve of $1.6 million for interest income earned during the year ended December 31, 2003 on the notes receivable. TODCO consolidated Delta Towing effective December 31, 2003 (see “―New Accounting Pronouncements”).
As part of the formation of the joint venture on January 31, 2001, TODCO entered into a charter arrangement with Delta Towing under which TODCO committed to charter certain vessels for a period of one year ending January 31, 2002, and committed to charter for a period of 2.5 years from date of delivery 10 crewboats then under construction, all of which have been placed into service as of March 1, 2003. TODCO also entered into an alliance agreement with Delta Towing under which TODCO agreed to treat Delta Towing as a preferred supplier for the provision of marine support services.
In 2003, TODCO incurred charges totaling $11.7 million from Delta Towing for services rendered, which were reflected in operating and maintenance expense.
DD LLC and DDII LLC—Prior to our purchase of ConocoPhillips’ interest in DD LLC and DDII LLC (see “— Acquisitions and Dispositions”), we were a party to drilling services agreements with DD LLC and DDII LLC for the
A-43 operation of the Deepwater Pathfinder and Deepwater Frontier, respectively. In 2003, we earned $1.6 million and $1.3 million for such drilling services from DD LLC and DDII LLC, respectively.
ODL—We own a 50 percent interest in an unconsolidated joint venture company, ODL. ODL owns the Joides Resolution, for which we provide certain operational and management services. In 2003, we earned $1.2 million for those services.
Separation of TODCO
Master Separation Agreement with TODCO—We entered into a master separation agreement with TODCO that provides for the completion of the separation of TODCO’s business from ours. It also governs aspects of the relationship between us and TODCO following the IPO. The master separation agreement provides for cross-indemnities that generally place financial responsibility on TODCO and its subsidiaries for all liabilities associated with the businesses and operations falling within the definition of TODCO’s business, and that generally place financial responsibility for liabilities associated with all of our businesses and operations with us, regardless of the time those liabilities arise.
Under the master separation agreement we also agreed to generally release TODCO, and TODCO agreed to generally release us, from any liabilities that arose prior to the closing of the IPO, including acts or events that occurred in connection with the separation or the IPO; provided, that specified ongoing obligations and arrangements between TODCO and our company are excluded from the mutual release.
The master separation agreement defines the TODCO business to generally mean contract drilling and similar services for oil and gas wells using jackup, submersible, barge and platform drilling rigs in the U.S. Gulf of Mexico and U.S. inland waters; contract drilling and similar services for oil and gas wells in and offshore Mexico, Trinidad, Colombia and Venezuela; and TODCO’s joint venture interest in Delta Towing. Our business is generally defined to include all of the businesses and activities not defined as the TODCO business and specifically includes contract drilling and similar services for oil and gas wells using semisubmersibles and drillships in the U.S. Gulf of Mexico; contract drilling and similar services for oil and gas wells in geographic regions outside of the U.S. Gulf of Mexico, U.S. inland waters, Mexico, Colombia, Trinidad and Venezuela; oil and gas exploration and production activities; coal production activities; and the turnkey drilling business that TODCO formerly operated in the U.S. Gulf of Mexico and offshore Mexico.
The master separation agreement also contains several provisions regarding TODCO’s corporate governance and accounting practices that apply as long as we own specified percentages of TODCO’s common stock. As long as we own shares representing a majority of the voting power of TODCO’s outstanding voting stock, we will have the right to nominate for designation by TODCO’s board of directors, or a nominating committee of the board, a majority of the members of the board, as well as the chairman of the board, and designate at least a majority of the members of any committee of TODCO’s board of directors.
If our beneficial ownership of TODCO’s common stock is reduced to a level of at least 10 percent but less than a majority of the voting power of TODCO’s outstanding voting stock, we will have the right to designate for nomination a number of directors proportionate to our voting power and designate one member of any committee of TODCO’s board of directors.
Tax Sharing Agreement with TODCO—Our wholly owned subsidiary, Transocean Holdings Inc. (“Transocean Holdings”), has entered into a tax sharing agreement with TODCO in connection with the IPO. The tax sharing agreement governs Transocean Holdings’ and TODCO’s respective rights, responsibilities and obligations with respect to taxes and tax benefits, the filing of tax returns, the control of audits and other tax matters. Under this agreement, all U.S. federal, state, local and foreign income taxes and income tax benefits (including income taxes and income tax benefits attributable to the TODCO business) that accrued on or before the closing of the IPO generally will be for the account of Transocean Holdings. Accordingly, Transocean Holdings generally will be liable for any income taxes that accrued on or before the closing of the IPO, but TODCO generally must pay Transocean Holdings for the amount of any income tax benefits created on or before the closing of the IPO (“pre-closing tax benefits”) that it uses or absorbs on a return with respect to a period after the closing of the IPO. As of December 31, 2003, TODCO is estimated to have approximately $450 million of pre-closing tax benefits subject to its obligation to reimburse Transocean Holdings, after elimination of those benefits TODCO expects to use in connection with its separation from Transocean Holdings. The ultimate amount will depend on many factors, including the ultimate allocation of tax benefits between TODCO and our other subsidiaries under applicable law and taxable income for calendar year 2004. This amount includes approximately $200 million of tax benefits reflected in Transocean’s December 31, 2003 historical financial statements and additional tax benefits expected to result from the closing of the offering, specified ownership changes, statutory allocations of tax benefits among Transocean Holdings consolidated group members and other events. The estimated tax benefits on these historical financial statements are before any reductions from a valuation allowance expected to be recorded during the first quarter of 2004 or any transactions that could occur after the IPO. Income
A-44 taxes and income tax benefits accruing after the closing of the IPO, to the extent attributable to Transocean Holdings or its affiliates (other than TODCO or its subsidiaries), generally will be for the account of Transocean Holdings and, to the extent attributable to TODCO or its subsidiaries, generally will be for the account of TODCO. However, TODCO will be responsible for all taxes, other than income taxes, attributable to the TODCO business, whether accruing before, on or after the closing of the IPO.
Exceptions to the general allocation rules discussed above may apply with respect to specific tax items or under special circumstances, including in circumstances where TODCO’s use or absorption of any pre-closing tax benefit defers or precludes its use or absorption of any income tax benefit created after the closing of the IPO or arises out of or relates to the alternative minimum tax provisions of the U.S. Internal Revenue Code. In addition, TODCO generally must pay Transocean Holdings for any tax benefits otherwise attributable to TODCO that result from the delivery by Transocean or its subsidiaries, after the closing of the IPO, of stock of Transocean to an employee of TODCO in connection with the exercise of an employee stock option. If any person other than Transocean or its subsidiaries becomes the beneficial owner of greater than 50 percent of the aggregate voting power of TODCO’s outstanding voting stock, TODCO will be deemed to have used or absorbed all pre-closing tax benefits and generally will be required to pay Transocean Holdings a specified amount for these pre-closing tax benefits at the time the requisite voting power is attained. Moreover, if any of TODCO’s subsidiaries that join with TODCO in the filing of consolidated returns ceases to join in the filing of such returns, TODCO will be deemed to have used that portion of the pre-closing tax benefits attributable to that subsidiary following the cessation, and TODCO generally will be required to pay Transocean Holdings a specified amount for this deemed tax benefit at the time such subsidiary ceases to join in the filing of such returns.
Other Agreements with TODCO—In addition to the agreements described above, we also entered into the following agreements with TODCO: (1) a transition services agreement under which we will provide specified administrative support during the transitional period following the closing of the IPO, (2) an employee matters agreement that allocates specified assets, liabilities and responsibilities relating to TODCO’s current and former employees and their participation in our benefit plans under which we have generally agreed to indemnify TODCO for employment liabilities arising from any acts of our employees or from claims by our employees against TODCO and for liabilities relating to benefits for our employees (and TODCO has generally agreed to similarly indemnify us) and (3) a registration rights agreement under which TODCO has agreed to register the sale of shares of TODCO’s common stock held by us under the Securities Act of 1933, as amended, and granted us “piggy-back” registration rights.
New Accounting Pronouncements
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement eliminates the requirement under SFAS 4 to aggregate and classify all gains and losses from extinguishment of debt as an extraordinary item, net of related income tax effect. This statement also amends SFAS 13 to require certain lease modifications with economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 requires reclassification of gains and losses in all prior periods presented in comparative financial statements related to debt extinguishment that do not meet the criteria for extraordinary item in Accounting Principles Board Opinion (“APB”) 30. The statement is effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. We adopted SFAS 145 effective January 1, 2003. As a result of our adoption of this statement, our results of operations for the year ended December 31, 2001 included $28.8 million related to the loss on early retirement of debt previously classified as an extraordinary item.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which is effective for fiscal years ending after December 15, 2002. SFAS 148 amends SFAS 123, to permit two additional transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic method under APB 25, Accounting for Stock Issued to Employees. The prospective method of transition under SFAS 123 is an option for entities adopting the recognition provisions of SFAS 123 in a fiscal year beginning before December 15, 2003. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements concerning the method of accounting used for stock- based employee compensation and the effects of that method on reported results of operations. Under SFAS 148, pro forma disclosures are required in a specific tabular format in the “Summary of Significant Accounting Policies.” We adopted the disclosure requirements of this statement as of December 31, 2002. The adoption had no effect on our consolidated financial position or results of operations. We adopted the fair value method of accounting for stock-based compensation using the prospective method of transition under SFAS 123 effective January 1, 2003. Compensation expense in 2003 increased approximately $4.3 million, net of tax of $1.8 million, as of result of the adoption. See Note 2 to our consolidated financial statements.
A-45 In January 2003, the FASB issued FIN 46. FIN 46 requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. The provisions of FIN 46 are effective immediately for those variable interest entities created after January 31, 2003. The provisions of FIN 46, as amended December 2003, are effective for the first interim or annual period ending after December 15, 2003 for those variable interest entities held prior to February 1, 2003 that are considered to be special purpose entities. The provisions, as amended, are to be applied no later than the end of the first reporting period that ends after March 15, 2004 for all other variable interest entities held prior to February 1, 2003. We have adopted and applied the provisions of FIN 46, as revised December 2003, effective December 31, 2003 for all variable interest entities.
At December 31, 2003, through our then wholly owned subsidiary, TODCO, we had a 25 percent ownership interest in Delta Towing, a joint venture established for the purpose of owning and operating inland and shallow water marine support vessel equipment. At the time Delta Towing was formed, it issued $144.0 million in notes to TODCO. Prior to the R&B Falcon merger, $64.0 million of the notes were fully reserved leaving an $80.0 million balance at January 31, 2001. This note agreement was subsequently amended to provide for a $4.0 million, three-year revolving credit facility. Delta Towing’s property and equipment with a net book value at December 31, 2003 of $50.6 million serve as collateral for TODCO’s notes receivable. The carrying value of the notes receivable, net of allowance for credit losses and equity losses in the joint venture, was $49.0 million at December 31, 2003. Delta Towing also issued a $3.0 million note to the 75 percent joint venture partner. Delta Towing is considered a variable interest entity as its equity is not sufficient to absorb its expected losses. Because TODCO has the largest percentage of investment at risk through the notes receivable, TODCO would absorb the majority of the joint venture’s expected losses; therefore, TODCO is deemed to be the primary beneficiary of Delta Towing for accounting purposes. As such, TODCO consolidated Delta Towing effective December 31, 2003 and the consolidation resulted in an increase in net assets and a corresponding gain as a cumulative effect of a change in accounting principle of approximately $0.8 million.
We are party to a sale/leaseback agreement for the semisubmersible drilling rig M.G. Hulme, Jr. with an unrelated third party leasing company (see “Off-Balance Sheet Arrangements—Sale/Leaseback”). Under the sale/leaseback agreement, we have the option to purchase the semisubmersible drilling rig at the end of the lease for a maximum amount of approximately $35.7 million. Because the sale/leaseback agreement is with an entity in which we have no direct investment, we are not entitled to receive the financial statements of the leasing entity and the equity holders of the leasing company will not release the financial statements or other financial information to us in order for us to make the determination of whether we have a variable interest in the entity. In addition, without the financial statements, we are unable to determine if we are the primary beneficiary of the entity and, if so, what we would consolidate. We have no exposure to loss as a result of the sale/leaseback agreement. We incurred rig rental expense related to the sale/leaseback agreement of $12.5 million, $12.6 million and $11.9 million during each of the years ended December 31, 2003, 2002 and 2001, respectively. We currently account for the lease of this semisubmersible drilling rig as an operating lease.
Risk Factors
Our business depends on the level of activity in the oil and gas industry, which is significantly affected by volatile oil and gas prices.
Our business depends on the level of activity in oil and gas exploration, development and production in market segments worldwide, with the U.S. and international offshore and U.S. inland marine areas being our primary market segments. Oil and gas prices and market expectations of potential changes in these prices significantly affect this level of activity. However, higher commodity prices do not necessarily translate into increased drilling activity since our customers' expectations of future commodity prices typically drive demand for our rigs. Worldwide military, political and economic events have contributed to oil and gas price volatility and are likely to do so in the future. Oil and gas prices are extremely volatile and are affected by numerous factors, including the following:
• worldwide demand for oil and gas,
• the ability of the Organization of Petroleum Exporting Countries, commonly called “OPEC,” to set and maintain production levels and pricing,
• the level of production in non-OPEC countries,
• the policies of various governments regarding exploration and development of their oil and gas reserves,
A-46 • advances in exploration and development technology, and
• the worldwide military and political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in the Middle East or other geographic areas or further acts of terrorism in the United States, or elsewhere.
The offshore and inland marine contract drilling industry is highly competitive with numerous industry participants, none of which has a dominant market share. Drilling contracts are traditionally awarded on a competitive bid basis. Intense price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig availability and the quality and technical capability of service and equipment may also be considered. Recent mergers among oil and natural gas exploration and production companies have reduced the number of available customers.
Our industry is highly competitive and cyclical, with intense price competition.
Our industry has historically been cyclical and is impacted by oil and gas price levels and volatility. There have been periods of high demand, short rig supply and high dayrates, followed by periods of low demand, excess rig supply and low dayrates. Changes in commodity prices can have a dramatic effect on rig demand, and periods of excess rig supply intensify the competition in the industry and often result in rigs being idle for long periods of time. We may be required to idle rigs or enter into lower rate contracts in response to market conditions in the future.
Our drilling contracts may be terminated due to a number of events.
We undertook a significant newbuild program that was completed in 2001. While we experienced some start-up difficulties with most of our newbuild rigs, we believe our newbuild fleet operations have progressed to a point where our newbuild fleet’s average downtime should be generally comparable to industry norms. However, the deepwater environments in which these newbuild rigs operate continue to present technological and engineering challenges so we are unable to provide assurances that future operational problems will not arise. Should problems occur that cause significant downtime or significantly affect a newbuild rig's performance or safety, our clients may attempt to terminate or suspend the drilling contract, particularly any of the remaining long-term contracts associated with these rigs. In the event of termination of a drilling contract for one of these rigs, it is unlikely that we would be able to secure a replacement contract on as favorable terms.
Our customers may terminate or suspend some of our term drilling contracts under various circumstances such as the loss or destruction of the drilling unit, downtime caused by equipment problems or sustained periods of downtime due to force majeure events. Some drilling contracts permit the customer to terminate the contract at the customer's option without paying a termination fee. Suspension of drilling contracts results in loss of the dayrate for the period of the suspension. If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, it could adversely affect our results of operations. In reaction to depressed market conditions, our customers may also seek renegotiation of firm drilling contracts to reduce their obligations.
Our business involves numerous operating hazards.
Our operations are subject to the usual hazards inherent in the drilling of oil and gas wells, such as blowouts, reservoir damage, and loss of production, loss of well control, punchthroughs, craterings and fires. The occurrence of these events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury or death to rig personnel. We may also be subject to personal injury and other claims of rig personnel as a result of our drilling operations. Operations also may be suspended because of machinery breakdowns, abnormal drilling conditions, and failure of subcontractors to perform or supply goods or services or personnel shortages. In addition, offshore drilling operators are subject to perils peculiar to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Damage to the environment could also result from our operations, particularly through oil spillage or extensive uncontrolled fires. We may also be subject to property, environmental and other damage claims by oil and gas companies. Our insurance policies and contractual rights to indemnity may not adequately cover losses, and we may not have insurance coverage or rights to indemnity for all risks.
Consistent with standard industry practice, our clients generally assume, and indemnify us against, well control and subsurface risks under dayrate contracts. These risks are those associated with the loss of control of a well, such as blowout or cratering, the cost to regain control or redrill the well and associated pollution. However, there can be no assurance that these clients will necessarily be financially able to indemnify us against all these risks. Also, we may be effectively prevented from enforcing these indemnities because of the nature of our relationship with some of our larger clients.
A-47 We maintain broad insurance coverages, including coverages for property damage, occupational injury and illness, and general and marine third-party liabilities. Property damage insurance covers against marine and other perils, including losses due to capsizing, grounding, collision, fire, lightning, hurricanes, wind, storms, and action of waves, punch-throughs, cratering, blowouts, explosions, and war risks. We insure all of our offshore drilling equipment for general and third party liabilities, occupational and illness risks, and property damage. We generally insure all of our offshore drilling rigs against property damage for their approximate fair market value.
In accordance with industry practices, we believe we are adequately insured for normal risks in our operations; however, such insurance coverage may not in all situations provide sufficient funds to protect us from all liabilities that could result from our drilling operations. Although our current practice is generally to insure all of our rigs for their approximate fair market value, our insurance would not completely cover the costs that would be required to replace certain of our units, including certain High-Specification Floaters. We have also increased our deductibles such that certain claims may not be reimbursed by insurance carriers. Such lack of reimbursement may cause the company to incur substantial costs.
Our non-U.S. operations involve additional risks not associated with our U.S. operations.
We operate in various regions throughout the world that may expose us to political and other uncertainties, including risks of:
• terrorist acts, war and civil disturbances; • expropriation or nationalization of equipment; and • the inability to repatriate income or capital.
We are protected to a substantial extent against loss of capital assets, but generally not loss of revenue, from most of these risks through insurance, indemnity provisions in our drilling contracts, or both. The necessity of insurance coverage for risks associated with political unrest, expropriation and environmental remediation for operating areas not covered under our existing insurance policies is evaluated on an individual contract basis. Although we maintain insurance in the areas in which we operate, pollution and environmental risks generally are not totally insurable. If a significant accident or other event occurs and is not fully covered by insurance or a recoverable indemnity from a client, it could adversely affect our consolidated financial position or results of operations. Moreover, no assurance can be made that we will be able to maintain adequate insurance in the future at rates we consider reasonable or be able to obtain insurance against certain risks, particularly in light of the instability and developments in the insurance markets following the recent terrorist attacks. As of March 1, 2004, all areas in which we were operating were covered by existing insurance policies.
Many governments favor or effectively require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may adversely affect our ability to compete.
Our non-U.S. contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipment and operation of drilling units, currency conversions and repatriation, oil and gas exploration and development and taxation of offshore earnings and earnings of expatriate personnel. Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration of oil and gas and other aspects of the oil and gas industries in their countries. In addition, government action, including initiatives by OPEC, may continue to cause oil or gas price volatility. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so.
Another risk inherent in our operations is the possibility of currency exchange losses where revenues are received and expenses are paid in nonconvertible currencies. We may also incur losses as a result of an inability to collect revenues because of a shortage of convertible currency available to the country of operation. We seek to limit these risks by structuring contracts such that compensation is made in freely convertible currencies and, to the extent possible, by limiting acceptance of non-convertible currencies to amounts that match our expense requirements in local currency. In January 2003, Venezuela implemented foreign exchange controls that limit TODCO’s ability to convert local currency into U.S. dollars and transfer excess funds out of Venezuela. The exchange controls could also result in an artificially high value being placed on the local Venezuela currency. In the third quarter of 2003, to limit our local currency exposure, we entered into an interim arrangement with one of our customers in which we are to receive 55 percent of the billed receivables in U.S. dollars with the remainder paid in local currency. Until new contracts have been negotiated, the interim arrangement will remain in place. See “—Item 7A. Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Risk.”
A-48 A change in tax laws of any country in which we operate could result in a higher tax rate on our worldwide earnings, and the transfer of assets by TODCO or one of its subsidiaries to Transocean or one of its other subsidiaries could result in the imposition of taxes.
We operate worldwide through our various subsidiaries. Consequently, we are subject to changing taxation policies in the jurisdictions in which we operate, which could include policies directed toward companies organized in jurisdictions with low tax rates. A material change in the tax laws of any country in which we have significant operations, including the U.S., could result in a higher effective tax rate on our worldwide earnings. In addition, our income tax returns are subject to review and examination in various jurisdictions in which we operate. See “—Outlook.”
We completed our restructuring of the ownership of a portion of the assets held by TODCO and its subsidiaries in connection with TODCO’s initial public offering. These transfers of assets by TODCO or one of its subsidiaries to Transocean or one of its other subsidiaries in this restructuring could, in some cases, result in the imposition of additional taxes.
Failure to retain key personnel could hurt our operations.
We require highly skilled personnel to operate and provide technical services and support for our drilling units. To the extent that demand for drilling services and the size of the worldwide industry fleet increase, shortages of qualified personnel could arise, creating upward pressure on wages. We are continuing our recruitment and training programs as required to meet our anticipated personnel needs.
On January 31, 2004, excluding TODCO employees, approximately 24 percent of our employees worldwide worked under collective bargaining agreements, most of whom worked in Brazil, Norway, U.K. and Nigeria. Of these represented employees, substantially all are working under agreements that are subject to salary negotiation in 2004. These negotiations could result in higher personnel expenses, other increased costs or increased operating restrictions.
TODCO also has employees working under collective bargaining agreements, most of whom were working in Venezuela and Trinidad. At January 31, 2004, approximately six percent of TODCO employees worked under collective bargaining agreements in Trinidad and Venezuela.
Our executive officers and nonemployee directors who also serve as directors of TODCO may have potential conflicts of interest as to matters relating to TODCO and Transocean.
Three of our executive officers are directors of TODCO, and one of our nonemployee directors is also a director of TODCO. As a result of their positions, these directors may have potential conflicts of interest as to matters relating to TODCO and Transocean. In connection with any transaction or other relationship involving the two companies, these directors may need to recuse themselves and not participate in any board action relating to these transactions or relationships. In addition, our interests may conflict with those of TODCO in a number of areas relating to our past and ongoing relationships. We may not be able to resolve any potential conflicts with TODCO and, even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated third party.
Compliance with or breach of environmental laws can be costly and could limit our operations.
Our operations are subject to regulations controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment. For example, as an operator of mobile offshore drilling units in navigable U.S. waters and some offshore areas, we may be liable for damages and costs incurred in connection with oil spills related to those operations. Laws and regulations protecting the environment have become more stringent in recent years, and may in some cases impose strict liability, rendering a person liable for environmental damage without regard to negligence. These laws and regulations may expose us to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on our consolidated financial position and results of operations.
We have generally been able to obtain some degree of contractual indemnification pursuant to which our clients agree to protect and indemnify us against liability for pollution, well and environmental damages; however, there is no assurance that we can obtain such indemnities in all of our contracts or that, in the event of extensive pollution and environmental damages, the clients will have the financial capability to fulfill their contractual obligations to us. Also, these indemnities may not be enforceable in all instances. Also, we may be effectively prevented from enforcing these indemnities because of the nature of our relationship with some of our larger clients.
A-49 World political events could affect the markets for drilling services.
On September 11, 2001, the U.S. was the target of terrorist attacks of unprecedented scope. In the past several years, world political events have resulted in military action in Afghanistan and Iraq. Military action by the U.S. or other nations could escalate and further acts of terrorism in the U.S. or elsewhere may occur. Such acts of terrorism could be directed against companies such as ours. These developments have caused instability in the world's financial and insurance markets. In addition, these developments could lead to increased volatility in prices for crude oil and natural gas and could affect the markets for drilling services. Insurance premiums have increased and could rise further and coverages may be unavailable in the future.
U.S. government regulations may effectively preclude us from actively engaging in business activities in certain countries. These regulations could be amended to cover countries where we currently operate or where we may wish to operate in the future.
Inflation
The general rate of inflation in the majority of the countries in which we operate has been moderate over the past several years and has not had a material impact on our results of operations. An increase in the demand for offshore drilling rigs usually leads to higher labor, transportation and other operating expenses as a result of an increased need for qualified personnel and services.
Forward-Looking Information
The statements included in this annual report regarding future financial performance and results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements to the effect that the Company or management “anticipates,” “believes,” “budgets,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” or “projects” a particular result or course of events, or that such result or course of events “could,” “might,” “may,” “scheduled” or “should” occur, and similar expressions, are also intended to identify forward-looking statements. Forward-looking statements in this annual report include, but are not limited to, statements involving payment of severance costs, contract commencements, potential revenues, increased expenses, commodity prices, customer drilling programs, supply and demand, utilization rates, dayrates, planned shipyard projects, expected downtime, effect of technical difficulties with newbuild rigs, future activity in the deepwater, mid-water and the shallow and inland water markets, market outlooks for our various geographical operating sectors, the relocation of rigs to the Middle East and India, the U.S. gas drilling market, rig classes and business segments, plans to dispose of our remaining interest in TODCO, the expected completion date, cost and loss on retirement and funding of the redemption of our 9.5% notes, the valuation allowance for deferred net tax assets of TODCO, the expected gain in connection with the TODCO IPO, intended reduction of debt, planned asset sales, timing of asset sales, proceeds from asset sales, reactivation of stacked units, future labor costs, signs and effects of increased drilling of deep wells in the inland waters of Louisiana and Texas, the Company's other expectations with regard to market outlook, operations in international markets, expected capital expenditures, results and effects of legal proceedings and governmental audits and assessments, adequacy of insurance, renewal and structure of directors’ and officers’ insurance, increase in overall insurance deductible, receipt of loss of hire insurance proceeds, liabilities for tax issues, liquidity, positive cash flow from operations, the exercise of the option of holders of Zero Coupon Convertible Debentures, the 1.5% Convertible Debentures or the 7.45% Notes to require the Company to repurchase the notes and debentures, and the satisfaction of such obligation in cash, adequacy of cash flow for 2004 obligations, effects of accounting changes, and the timing and cost of completion of capital projects. Such statements are subject to numerous risks, uncertainties and assumptions, including, but not limited to, those described under “—Risk Factors” above, the adequacy of sources of liquidity, the effect and results of litigation, audits and contingencies and other factors discussed in this annual report and in the Company's other filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward- looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.
A-50 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our long-term and short-term debt. The table below presents scheduled debt and related weighted-average interest rates for each of the years ended December 31 relating to debt as of December 31, 2003. Weighted-average variable rates are based on London Interbank Offered Rate in effect at December 31, 2003, plus applicable margins.
At December 31, 2003 (in millions, except interest rate percentages):
Scheduled Maturity Date (a) (b) Fair Value 2004 2005 2006 2007 2008 Thereafter Total 12/31/03 Total debt Fixed rate ...... $45.8 $370.3 $400.0 $100.0 $569.0 $1,750.0 $3,235.1 $3,599.8 Average interest rate 7.4% 6.8% 1.5% 7.5% 8.2% 7.2% 6.6% Variable rate ...... −− − −$250.0 − $ 250.0 $ 250.0 Average interest rate ...... −− − − 1.7% − 1.7% ______(a) Maturity dates of the face value of our debt assumes the put options on the 1.5% Convertible Debentures, 7.45% Notes and Zero Coupon Convertible Debentures will be exercised in May 2006, April 2007 and May 2008, respectively. (b) Expected maturity amounts are based on the face value of debt.
At December 31, 2003, we had approximately $250.0 million of variable rate debt at face value (7.2 percent of total debt at face value). This variable rate debt represented revolving credit bank debt. Given outstanding amounts as of that date, a one percent rise in interest rates would result in an additional $1.9 million in interest expense per year. Offsetting this, a large part of our cash investments would earn commensurately higher rates of return. Using December 31, 2003 cash investment levels, a one percent increase in interest rates would result in approximately $4.7 million of additional interest income per year.
Foreign Exchange Risk
Our international operations expose us to foreign exchange risk. We use a variety of techniques to minimize the exposure to foreign exchange risk. Our primary foreign exchange risk management strategy involves structuring customer contracts to provide for payment in both U.S. dollars, which is our functional currency, and local currency. The payment portion denominated in local currency is based on anticipated local currency requirements over the contract term. Due to various factors, including local banking laws, other statutory requirements, local currency convertibility and the impact of inflation on local costs, actual foreign exchange needs may vary from those anticipated in the customer contracts, resulting in partial exposure to foreign exchange risk. Fluctuations in foreign currencies typically have minimal impact on overall results. In situations where payments of local currency do not equal local currency requirements, foreign exchange derivative instruments, specifically foreign exchange forward contracts or spot purchases, may be used. We do not enter into derivative transactions for speculative purposes. At December 31, 2003, we had no material open foreign exchange contracts.
In January 2003, Venezuela implemented foreign exchange controls that limit our ability to convert local currency into U.S. dollars and transfer excess funds out of Venezuela. The exchange controls could also result in an artificially high value being placed on the local currency. As a result, we recognized a loss of $1.5 million, net of tax of $0.8 million, on the revaluation of the local currency into functional U.S dollars during the second quarter of 2003. In the third quarter of 2003, to limit our local currency exposure, we entered into an interim arrangement with one of our customers in which we are to receive 55 percent of the billed receivables in U.S. dollars with the remainder paid in local currency. Until new contracts have been negotiated, the interim arrangement will remain in place.
A-51
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Transocean Inc.
We have audited the accompanying consolidated balance sheets of Transocean Inc. and Subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in Item 15(a) of this Form 10-K. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transocean Inc. and Subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Statements of Financial Accounting Standards Nos. 123 and 142, effective January 1, 2003 and January 1, 2002, respectively.
/s/ Ernst & Young LLP
Houston, Texas January 29, 2004
F-1 TRANSOCEAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share data) Years ended December 31, 2003 2002 2001
Operating Revenues ...... $2,333.8 $ 2,673.9 $2,820.1 Contract drilling revenues...... 100.5 −− Client reimbursable revenues ...... 2,434.3 2,673.9 2,820.1
Costs and Expenses Operating and maintenance ...... 1,610.4 1,494.2 1,603.3 Depreciation...... 508.2 500.3 470.1 Goodwill amortization ...... − − 154.9 General and administrative ...... 65.3 65.6 57.9 Impairment loss on long-lived assets and goodwill ...... 16.5 2,927.4 40.4 Gain from sale of assets, net...... (5.8) (3.7) (56.5) 2,194.6 4,983.8 2,270.1 Operating Income (Loss)...... 239.7 (2,309.9) 550.0
Other Income (Expense), net Equity in earnings of joint ventures...... 5.1 7.8 16.5 Interest income...... 18.8 25.6 18.7 Interest expense, net of amounts capitalized...... (202.0) (212.0) (223.9) Loss on retirement of debt ...... (15.7) − (28.8) Impairment loss on note receivable from related party...... (21.3) − − Other, net ...... (3.0) (0.3) (0.8) (218.1) (178.9) (218.3) Income (Loss) Before Income Taxes, Minority Interest and Cumulative Effect of Changes in Accounting Principles...... 21.6 (2,488.8) 331.7 Income Tax Expense (Benefit) ...... 3.0 (123.0) 76.2 Minority Interest ...... 0.2 2.4 2.9 Income (Loss) Before Cumulative Effect of Changes in Accounting Principles...... 18.4 (2,368.2) 252.6 Cumulative Effect of Changes in Accounting Principles ...... 0.8 (1,363.7) − Net Income (Loss) ...... $ 19.2 $(3,731.9) $ 252.6
Basic Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of Changes in Accounting Principles...... $ 0.06 $ (7.42) $ 0.82 Cumulative Effect of Changes in Accounting Principles...... − (4.27) − Net Income (Loss)...... $ 0.06 $ (11.69) $ 0.82
Diluted Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of Changes in Accounting Principles...... $ 0.06 $ (7.42) $ 0.80 Cumulative Effect of Changes in Accounting Principles...... − (4.27) − Net Income (Loss)...... $ 0.06 $ (11.69) $ 0.80
Weighted Average Shares Outstanding Basic ...... 319.8 319.1 309.2 Diluted ...... 321.4 319.1 314.8
Dividends Paid Per Share...... $ − $ 0.06 $ 0.12
See accompanying notes.
F-2 TRANSOCEAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In millions)
Years ended December 31, 2003 2002 2001
Net Income (Loss) ...... $19.2 $(3,731.9) $252.6 Other Comprehensive Income (Loss), net of tax Gain on terminated interest rate swaps...... − − 4.1 Amortization of gain on terminated interest rate swaps...... (0.2) (0.3) (0.2) Change in unrealized loss on securities available for sale...... 0.2 − (0.6) Share of unrealized loss in unconsolidated joint venture’s interest rate swaps...... − − (5.6) Change in share of unrealized loss in unconsolidated joint venture’s interest rate swaps (net of tax expense (benefit) of $1.1 and $(1.1) for the years ended December 31, 2003 and 2002, respectively)...... 2.0 3.6 − Change in minimum pension liability (net of tax expense (benefit) of $0.7 and $(13.2) for the years ended December 31, 2003 and 2002, respectively)...... 9.3 (32.5) − Other Comprehensive Income (Loss) ...... 11.3 (29.2) (2.3) Total Comprehensive Income (Loss)...... $30.5 $(3,761.1) $250.3
See accompanying notes.
F-3 TRANSOCEAN INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions, except share data)
December 31, 2003 2002 ASSETS Cash and Cash Equivalents...... $ 474.0 $ 1,214.2 Accounts Receivable, net Trade ...... 435.3 437.6 Other...... 45.0 61.7 Materials and Supplies, net...... 152.0 155.8 Deferred Income Taxes...... 41.021.9 Other Current Assets...... 31.6 20.5 Total Current Assets...... 1,178.9 1,911.7
Property and Equipment ...... 10,673.0 10,198.0 Less Accumulated Depreciation ...... 2,663.4 2,168.2 Property and Equipment, net ...... 8,009.6 8,029.8 Goodwill ...... 2,230.8 2,218.2 Investments in and Advances to Joint Ventures ...... 5.5 108.5 Deferred Income Taxes, net...... 28.2 26.2 Other Assets...... 209.6 370.7 Total Assets ...... $11,662.6 $12,665.1
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable...... $ 146.1 $ 134.1 Accrued Income Taxes ...... 57.2 59.5 Debt Due Within One Year ...... 45.8 1,048.1 Other Current Liabilities...... 262.0 262.2 Total Current Liabilities ...... 511.1 1,503.9
Long-Term Debt ...... 3,612.3 3,629.9 Deferred Income Taxes...... 42.8107.2 Other Long-Term Liabilities...... 303.8 282.7 Total Long-Term Liabilities ...... 3,958.9 4,019.8
Commitments and Contingencies
Preference Shares, $0.10 par value; 50,000,000 shares authorized, none issued and outstanding...... − – Ordinary Shares, $0.01 par value; 800,000,000 shares authorized, 319,926,500 and 319,219,072 shares issued and outstanding at December 31, 2003 and 2002, respectively ...... 3.2 3.2 Additional Paid-in Capital ...... 10,643.8 10,623.1 Accumulated Other Comprehensive Loss ...... (20.2) (31.5) Retained Deficit...... (3,434.2) (3,453.4) Total Shareholders' Equity ...... 7,192.6 7,141.4 Total Liabilities and Shareholders' Equity...... $11,662.6 $12,665.1
See accompanying notes.
F-4 TRANSOCEAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (In millions, except per share data) Accumulated Additional Other Retained Ordinary Shares Paid-in Comprehensive Earnings Total Shares Amount Capital Income (Loss) (Deficit) Equity
Balance at December 31, 2000 ...... 210.7 $2.1 $ 3,918.7 $ – $ 83.3 $ 4,004.1 Net income ...... – – – – 252.6 252.6 Shares issued for R&B Falcon merger ...... 106.1 1.1 6,654.9 – – 6,656.0 Issuance of ordinary shares under stock-based compensation plans...... 1.6 – 45.2 – – 45.2 Issuance of ordinary shares upon exercise of warrants...... 0.6 – 10.6 – – 10.6 Cash dividends ($0.12 per share)...... – – – – (38.2) (38.2) Gain on terminated interest rate swaps... – – – 3.9 – 3.9 Fair value adjustment on marketable securities held for sale ...... – – – (0.6) – (0.6) Other comprehensive income related to joint venture...... – – – (5.6) – (5.6) Other...... (0.2) – (17.7) – – (17.7)
Balance at December 31, 2001 ...... 318.8 3.2 10,611.7 (2.3) 297.7 10,910.3 Net loss...... – – – – (3,731.9) (3,731.9) Issuance of ordinary shares under stock-based compensation plans...... 0.4 − 10.9 −−10.9 Cash dividends ($0.06 per share)...... − − − − (19.2) (19.2) Gain on terminated interest rate swaps... −− − (0.3) − (0.3) Other comprehensive income related to joint venture...... −− − − 3.6 − 3.6 Minimum pension liability ...... −− − (32.5) − (32.5) Other...... −− 0.5 −−0.5
Balance at December 31, 2002 ...... 319.2 3.2 10,623.1 (31.5) (3,453.4) 7,141.4 Net income ...... – – – – 19.2 19.2 Issuance of ordinary shares under stock-based compensation plans...... 0.7 − 14.0 −−14.0 Gain on terminated interest rate swaps... −− − (0.2) − (0.2) Fair value adjustment on marketable securities held for sale...... −− − 0.2 − 0.2 Other comprehensive income related to joint venture...... −− −−2.0 − 2.0 Minimum pension liability ...... −− − 9.3 − 9.3 Other...... − − 6.7 − − 6.7
Balance at December 31, 2003 ...... 319.9 $3.2 $10,643.8 $(20.2) $(3,434.2) $ 7,192.6
See accompanying notes.
F-5 TRANSOCEAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Years ended December 31, 2003 2002 2001 Cash Flows from Operating Activities Net income (loss) ...... $ 19.2 $(3,731.9) $ 252.6 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation...... 508.2 500.3 470.1 Goodwill amortization ...... − − 154.9 Impairment loss on goodwill ...... − 4,239.7 – Deferred income taxes ...... (98.5) (224.4) (107.7) Equity in earnings of joint ventures ...... (5.1) (7.8) (16.5) Net (gain) loss from disposal of assets...... 13.4 3.9 (52.5) Loss on retirement of debt ...... 15.7 − 28.8 Impairment loss on long-lived assets...... 16.5 51.4 40.4 Impairment loss on note receivable from related party...... 21.3 −− Amortization of debt-related discounts/premiums, fair value adjustments and issue costs, net ...... (24.3) 6.2 (4.0) Deferred income, net...... 4.4 (5.5) (46.7) Deferred expenses, net...... (33.2) (20.0) (53.8) Other long-term liabilities...... 10.8 17.1 (2.1) Other, net ...... 15.8 (13.4) 5.1 Changes in operating assets and liabilities, net of effects from the R&B Falcon merger Accounts receivable...... 19.8 179.4 (55.2) Accounts payable and other current liabilities...... 6.5 (78.8) (95.9) Income taxes receivable/payable, net...... 27.8 8.9 48.2 Other current assets...... 7.5 11.5 (5.3) Net Cash Provided by Operating Activities...... 525.8 936.6 560.4
Cash Flows from Investing Activities Capital expenditures...... (495.9) (141.0) (506.2) Note issued to related party...... (46.1) −− Payments received from note issued to related party...... 46.1 −− Deepwater Drilling II L.L.C.’s cash acquired, net of cash paid...... 18.1 – – Deepwater Drilling L.L.C.’s cash acquired...... 18.6 −− Proceeds from sale of securities...... − –17.2 Proceeds from sale of subsidiary...... − –85.6 Proceeds from disposal of assets, net...... 8.4 88.3 116.1 Merger costs paid...... − –(24.4) Cash acquired in merger, net of cash paid ...... − –264.7 Joint ventures and other investments, net...... 3.3 7.4 20.6 Net Cash Used in Investing Activities...... (447.5) (45.3) (26.4)
See accompanying notes.
F-6 TRANSOCEAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In millions)
Years ended December 31, 2003 2002 2001 Cash Flows from Financing Activities Net borrowings (repayments) under commercial paper program...... − (326.4) 326.4 Net borrowings from issuance of debt...... 2.1 – 1,693.5 Net borrowings (repayments) on revolving credit agreements...... 250.0 – (180.1) Repayments on other debt instruments...... (1,252.7) (189.3) (1,551.0) Cash from termination of interest rate swaps ...... 173.5 −− Net proceeds from issuance of ordinary shares under stock-based compensation plans...... 12.8 10.2 29.6 Proceeds from issuance of ordinary shares upon exercise of warrants...... − –10.6 Dividends paid...... − (19.1) (38.2) Financing costs...... (4.9) (8.5) (15.2) Other, net...... 0.7 2.6 9.3 Net Cash Provided by (Used in) Financing Activities...... (818.5) (530.5) 284.9
Net Increase (Decrease) in Cash and Cash Equivalents...... (740.2) 360.8 818.9 Cash and Cash Equivalents at Beginning of Period...... 1,214.2 853.4 34.5 Cash and Cash Equivalents at End of Period...... $ 474.0 $ 1,214.2 $ 853.4
See accompanying notes.
F-7 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Nature of Business and Principles of Consolidation
Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, the “Company”) is a leading international provider of offshore contract drilling services for oil and gas wells. The Company’s mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. The Company specializes in technically demanding segments of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. At December 31, 2003, the Company owned, had partial ownership interests in or operated 96 mobile offshore and barge drilling units, excluding the fleet of TODCO (together with its subsidiaries and predecessors, unless the context requires otherwise, “TODCO”), a publicly traded company as of February 2004 in which the Company owns a majority interest. As of this date, the Company's assets consisted of 32 High-Specification semisubmersibles and drillships (“floaters”), 26 Other Floaters, 26 Jackup Rigs and 12 Other Rigs. As of December 31, 2003, TODCO’s fleet consisted of 24 jackups, 30 drilling barges, nine land rigs, three submersible drilling rigs and four other drilling rigs. The Company contracts its drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. The Company also provides additional services, including management of third party well service activities.
On January 31, 2001, the Company completed a merger transaction (the “R&B Falcon merger”) with R&B Falcon Corporation (“R&B Falcon”). At the time of the merger, R&B Falcon owned, had partial ownership interests in, operated or had under construction more than 100 mobile offshore drilling units consisting of drillships, semisubmersibles, jackup rigs and other units in addition to the Gulf of Mexico Shallow and Inland Water segment fleet. As a result of the merger, R&B Falcon became an indirect wholly owned subsidiary of the Company. The merger was accounted for as a purchase with the Company as the accounting acquiror. The consolidated statements of operations and cash flows for the year ended December 31, 2001 include 11 months of operating results and cash flows for the merged company.
In July 2002, the Company announced plans to pursue a divestiture of its Gulf of Mexico Shallow and Inland Water business, which was a part of R&B Falcon. R&B Falcon’s overall business was considerably broader than the Gulf of Mexico Shallow and Inland Water business. In preparation for this divestiture, the Company began the transfer of all assets and businesses out of R&B Falcon that were unrelated to the Gulf of Mexico Shallow and Inland Water business. In December 2002, R&B Falcon changed its name to TODCO and, in January 2004, the Gulf of Mexico Shallow and Inland Water business segment became known as the TODCO segment. In February 2004, TODCO completed an initial public offering (“IPO”) (see Note 25). Before the closing of the IPO, TODCO completed the transfer to the Company of all unrelated assets and businesses.
For investments in joint ventures that do not meet the criteria of a variable interest entity and where the Company is not deemed to be the primary beneficiary for accounting purposes of those entities that meet the variable interest entity criteria, the equity method of accounting is used for investments in joint ventures where the Company's ownership is between 20 percent and 50 percent and for investments in joint ventures owned more than 50 percent where the Company does not have significant influence over the joint venture. The cost method of accounting is used for investments in joint ventures where the Company's ownership is less than 20 percent and the Company does not have significant influence over the joint venture. For investments in joint ventures that meet the criteria of a variable interest entity and where the Company is deemed to be the primary beneficiary for accounting purposes, such entities are consolidated (see Note 2). Intercompany transactions and accounts are eliminated.
Note 2—Summary of Significant Accounting Policies
Accounting Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, materials and supplies obsolescence, investments, intangible assets and goodwill, property and equipment and other long-lived assets, income taxes, financing operations, workers' insurance, pensions and other postretirement benefits, other employment benefits and contingent liabilities. The Company bases its estimates on historical experience and on various other assumptions it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.
Segments—The Company's operations have been aggregated into two reportable business segments: (i) Transocean Drilling (formerly “International and U.S. Floater Contract Drilling Services”) and (ii) TODCO (formerly “Gulf of Mexico Shallow and Inland Water”). The Company provides services with different types of drilling equipment in several geographic regions. The location of the Company's operating assets and the allocation of resources to build or upgrade drilling units are determined by the activities and needs of customers. See Note 19.
F-8 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cash and Cash Equivalents—Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and may consist of time deposits with a number of commercial banks with high credit ratings, Eurodollar time deposits, certificates of deposit and commercial paper. The Company may also invest excess funds in no-load, open-end, management investment trusts (“mutual funds”). The mutual funds invest exclusively in high quality money market instruments. Generally, the maturity date of the Company's investments is the next business day.
As a result of the Deepwater Nautilus project financing in 1999, the Company is required to maintain in cash an amount to cover certain principal and interest payments. Such restricted cash, classified as other assets in the consolidated balance sheets, was $12.0 million and $13.2 million at December 31, 2003 and 2002, respectively.
Accounts and Notes Receivable—Accounts receivable trade are stated at the historical carrying amount net of write- offs and allowance for doubtful accounts receivable. Interest receivable on delinquent accounts receivable is included in the accounts receivable trade balance and recognized as interest income when chargeable and collectibility is reasonably assured. Notes receivable, included in investments in and advances to joint ventures, are carried at the historical carrying amount net of write-offs and allowance for loan loss. Interest receivable on notes receivable, which is included in accounts receivable-other, is accrued and recognized as interest income monthly on any unimpaired loan balance. The Company’s notes receivable do not have premiums or discounts associated with their balances. Uncollectible notes and accounts receivable trade are written off when a settlement is reached for an amount that is less than the outstanding historical balance. With the consolidation of Delta Towing Holdings, LLC (“Delta Towing”), TODCO’s notes receivable have been eliminated from the Company’s consolidated balance sheet at December 31, 2003 (see “—New Accounting Pronouncements”).
Allowance for Doubtful Accounts—The Company establishes an allowance for doubtful accounts on a case-by-case basis when it believes the required payment of specific amounts owed is unlikely to occur. This allowance was approximately $29 million and $21 million at December 31, 2003 and 2002, respectively. An allowance for loan loss is established when events or circumstances indicate that both the contractual interest and principal for a note receivable are not fully collectible. A loan is considered delinquent when principal and/or interest payments have not been made in accordance with the payment terms of the loan. Collectibility is determined based on estimated future cash flows discounted at the respective loan’s effective interest rate with the excess of the loan’s total contractual interest and principal over the estimated discounted future cash flows recorded as an allowance for loan loss. During the year ended December 31, 2003, TODCO recorded an allowance for loan loss of $21.3 million (see Note 20). As a result of the consolidation of Delta Towing, the allowance, together with the note receivable balance, was eliminated from the Company’s consolidated balance sheet (see “—New Accounting Pronouncements”). There was no allowance for loan loss at December 31, 2003 and 2002.
Materials and Supplies—Materials and supplies are carried at the lower of average cost or market less an allowance for obsolescence. Such allowance was approximately $17 million and $19 million at December 31, 2003 and 2002, respectively.
Property and Equipment—Property and equipment, consisting primarily of offshore drilling rigs and related equipment, represented more than 65 percent of the Company’s total assets at December 31, 2003. The carrying values of these assets are based on estimates, assumptions and judgments relative to capitalized costs, useful lives and salvage values of the Company’s rigs. These estimates, assumptions and judgments reflect both historical experience and expectations regarding future industry conditions and operations. Property and equipment obtained in the R&B Falcon merger (see Note 4) were recorded at fair value. The Company generally provides for depreciation using the straight-line method after allowing for salvage values. Expenditures for renewals, replacements and improvements are capitalized. Maintenance and repairs are charged to operating expense as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income.
As a result of the R&B Falcon merger, the Company conformed its policies relating to estimated rig lives and salvage values. Estimated useful lives of its drilling units now range from 18 to 35 years, reflecting maintenance history and market demand for these drilling units, buildings and improvements from 10 to 30 years and machinery and equipment from four to 12 years. Depreciation expense for the year ended December 31, 2001 was reduced by approximately $23 million ($0.07 per diluted share) as a result of conforming these policies.
Assets Held for Sale—Assets are classified as held for sale when the Company has a plan for disposal of certain assets and those assets meet the held for sale criteria of the Financial Accounting Standards Board's (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 144, Accounting for Impairment or Disposal of Long-Lived Assets. The Company had no
F-9 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
assets classified as held for sale at December 31, 2003 and 2002.
Goodwill—Prior to the adoption of SFAS 142, Goodwill and Other Intangible Assets, the excess of the purchase price over the estimated fair value of net assets acquired was accounted for as goodwill and was amortized on a straight-line basis based on a 40-year life. The amortization period was based on the nature of the offshore drilling industry, long-lived drilling equipment and the long-standing relationships with core customers. In accordance with SFAS 142, goodwill is no longer amortized and is now tested for impairment at the reporting unit level, which is defined as an operating segment or a component of an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. Management has determined that the Company's reporting units are the same as its operating segments for the purpose of allocating goodwill and the subsequent testing of goodwill for impairment. Goodwill resulting from the R&B Falcon merger was allocated to the Company's two reporting units, Transocean Drilling and TODCO, at a ratio of 68 percent and 32 percent, respectively. The allocation was determined based on the percentage of each reporting unit’s assets at fair value to the total fair value of assets acquired in the R&B Falcon merger. The fair value was determined from a third party valuation. Goodwill resulting from previous mergers was allocated entirely to the Transocean Drilling reporting unit.
During the first quarter of 2002, the Company implemented SFAS 142 and performed the initial test of impairment of goodwill on its two reporting units. The test was applied utilizing the estimated fair value of the reporting units as of January 1, 2002 determined based on a combination of each reporting unit’s discounted cash flows and publicly traded company multiples and acquisition multiples of comparable businesses. There was no goodwill impairment for the Transocean Drilling reporting unit. However, because of deterioration in market conditions that affected the TODCO reporting unit since the completion of the R&B Falcon merger, a $1,363.7 million ($4.27 per diluted share) impairment of goodwill was recognized as a cumulative effect of a change in accounting principle in the first quarter of 2002.
During the fourth quarter of 2002, the Company performed its annual test of goodwill impairment as of October 1. Due to a general decline in market conditions, the Company recorded a non-cash impairment charge of $2,876.0 million ($9.01 per diluted share) of which $2,494.1 million and $381.9 million related to the Transocean Drilling and TODCO reporting units, respectively.
During the fourth quarter of 2003, the Company performed its annual test of goodwill impairment as of October 1 with no impairment indicated for the year ended December 31, 2003.
The Company’s goodwill balance and changes in the carrying amount of goodwill are as follows (in millions):
Balance at Balance at January 1, December 31, 2003 Other (a) 2003
Transocean Drilling ...... $2,218.2 $12.6 $2,230.8 ______(a) Primarily represents net unfavorable adjustments during 2003 of income tax-related pre-acquisition contingencies related to the R&B Falcon merger.
F-10 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Net income (loss) and earnings (loss) per share for the years ended December 31, 2003, 2002 and 2001 adjusted for goodwill amortization are as follows (in millions, except per share data):
Years ended December 31, 2003 2002 2001 Reported income (loss) before cumulative effect of changes in accounting principles...... $18.4 $(2,368.2) $252.6 Add back: Goodwill amortization...... − − 154.9 Adjusted reported income (loss) before cumulative effect of changes in accounting principles...... 18.4 (2,368.2) 407.5 Cumulative effect of changes in accounting principles...... 0.8 (1,363.7) − Adjusted net income (loss)...... $ 19.2 $(3,731.9) $ 407.5
Basic earnings (loss) per share: Reported income (loss) before cumulative effect of changes in accounting principles...... $ 0.06 $ (7.42) $ 0.82 Goodwill amortization ...... − − 0.50 Adjusted reported income (loss) before cumulative effect of changes in accounting principles...... 0.06 (7.42) 1.32 Cumulative effect of changes in accounting principles...... − (4.27) − Adjusted net income (loss)...... $ 0.06 $ (11.69) $ 1.32
Diluted earnings (loss) per share: Reported income (loss) before cumulative effect of changes in accounting principles...... $ 0.06 $ (7.42) $ 0.80 Goodwill amortization ...... − − 0.49 Adjusted reported income (loss) before cumulative effect of changes in accounting principles...... 0.06 (7.42) 1.29 Cumulative effect of changes in accounting principles...... − (4.27) − Adjusted net income (loss)...... $ 0.06 $ (11.69) $ 1.29
Impairment of Long-Lived Assets—The carrying value of long-lived assets, principally property and equipment, is reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. For property and equipment held for use, the determination of recoverability is made based upon the estimated undiscounted future net cash flows of the related asset or group of assets being evaluated. Property and equipment held for sale are recorded at the lower of net book value or net realizable value. See Note 7.
Operating Revenues and Expenses—Operating revenues are recognized as earned, based on contractual daily rates or on a fixed price basis. Although the Company ceased providing turnkey drilling services in 2001, turnkey profits were recognized on completion of the well and acceptance by the customer. Events occurring after the date of the financial statements and before the financial statements are issued that are within the normal exposure and risk aspects of the turnkey contracts were considered refinements of the estimation process of the prior year and were recorded as adjustments at the date of the financial statements. Provisions for losses are made on contracts in progress when losses are anticipated. In connection with drilling contracts, the Company may receive revenues for preparation and mobilization of equipment and personnel or for capital improvements to rigs. In connection with new drilling contracts, revenues earned and incremental costs incurred directly related to preparation and mobilization are deferred and recognized over the primary contract term of the drilling project. Costs of relocating drilling units without contracts to more promising market areas are expensed as incurred. Upon completion of drilling contracts, any demobilization fees received are reported in income, as are any related expenses. Capital upgrade revenues received are deferred and recognized over the primary contract term of the drilling project. The actual cost incurred for the capital upgrade is depreciated over the estimated useful life of the asset. The Company incurs periodic survey and drydock costs in connection with obtaining regulatory certification to operate its rigs on an ongoing basis. Costs associated with these certifications are deferred and amortized over the period until the next survey.
F-11 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Capitalized Interest—Interest costs for the construction and upgrade of qualifying assets are capitalized. The Company incurred total interest expense of $202.0 million, $212.0 million and $258.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. The Company capitalized interest costs on construction work in progress of $34.9 million for the year ended December 31, 2001. No interest cost was capitalized during the years ended December 31, 2003 and 2002.
Derivative Instruments and Hedging Activities—The Company accounts for its derivative instruments and hedging activities in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities. See Notes 9 and 10.
Foreign Currency Translation—The Company accounts for translation of foreign currency in accordance with SFAS 52, Foreign Currency Translation. The majority of the Company's revenues and expenditures are denominated in U.S. dollars to limit the Company's exposure to foreign currency fluctuations, resulting in the use of the U.S. dollar as the functional currency for all of the Company's operations. Foreign currency exchange gains and losses are included in other income (expense) as incurred. Net foreign currency gains (losses) were $(3.5) million, $(0.5) million, and $1.1 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Income Taxes—Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. The income tax rates imposed by these taxing authorities vary substantially. Taxable income may differ from pre-tax income for financial accounting purposes, particularly in countries with revenue-based taxes. There is no expected relationship between the provision for income taxes and income before income taxes because the countries in which the Company operates have different taxation regimes, which vary not only with respect to nominal rate but also in terms of the availability of deductions, credits and other benefits. Variations also arise because income earned and taxed in any particular country or countries may fluctuate from period to period. Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company's assets and liabilities using the applicable tax rates in effect at year end. A valuation allowance for deferred tax assets is recorded when it is more likely than not that, some or all of the benefit from the deferred tax asset will not be realized. See Note 14.
Stock-Based Compensation—In accordance with the provisions of SFAS 123, Accounting for Stock-Based Compensation, the Company had elected to follow the Accounting Principles Board Opinion (“APB”) 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock-based compensation plans through December 31, 2002 (see “—New Accounting Pronouncements” and Note 16). Under the intrinsic value method of APB 25, if the exercise price of employee stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized. If an employee stock option is modified subsequent to the original grant date, and the exercise price is less than the fair value of the underlying stock on the date of the modification, compensation expense equal to the excess of the fair value over the exercise price is recognized over the remaining vesting period. Compensation expense for grants of restricted shares to employees is calculated based on the fair value of the shares on the date of grant and is recognized over the vesting period. Stock appreciation rights are considered variable grants and are recorded at fair value, with the change in the recorded fair value recognized as compensation expense.
Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123 using the prospective method. Under the prospective method and in accordance with the provisions of SFAS 148, Accounting for Stock- Based Compensation – Transition and Disclosure, the recognition provisions are applied to all employee awards granted, modified, or settled after January 1, 2003. As a result of the adoption of SFAS 123, the Company recorded higher compensation expense of $4.3 million ($0.01 per diluted share), net of tax of $1.8 million, related to its stock-based compensation awards and modifications, and its Employee Stock Purchase Plan (“ESPP”) during 2003.
F-12 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The expense related to stock-based employee compensation included in the determination of net income for the years ended December 31, 2003, 2002 and 2001 would be less than that which would have been recognized if the fair value method had been applied to all awards granted after the original effective date of SFAS 123. If the Company had elected to adopt the fair value recognition provisions of SFAS 123 as of its original effective date, pro forma net income and diluted net income per share would have been as follows:
Years ended December 31, 2003 2002 2001
Net Income (Loss) as Reported ...... $ 19.2 $(3,731.9) $252.6 Add back: Stock-based compensation expense included in reported net income (loss), net of related tax effects...... 4.6 2.8 0.1 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects Long-Term Incentive Plan ...... (17.6) (23.5) (11.2) ESPP ...... (2.5) (2.2) (1.7)
Pro Forma net income (loss) ...... $ 3.7 $(3,754.8) $239.8
Basic Earnings (Loss) Per Share As Reported...... $ 0.06 $ (11.69) $ 0.82 Pro Forma...... 0.01 (11.77) 0.78
Diluted Earnings (Loss) Per Share As Reported...... $ 0.06 $ (11.69) $ 0.80 Pro Forma...... 0.01 (11.77) 0.76
The above pro forma amounts are not indicative of future pro forma results. The fair value of each option grant under the Long-Term Incentive Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used:
Years ended December 31, 2003 2002 2001 Dividend yield ...... – – 0.30% Expected price volatility range...... 39%-45% 49%-51% 50%-51% Risk-free interest rate range...... 1.94%-3.16% 2.79%-4.11% 4.13%-5.25% Expected life of options (in years)...... 4.21 3.84 4.00 Weighted-average fair value of options granted...... $7.13 $12.25 $16.26
The fair value of each option grant under the ESPP was estimated using the following weighted-average assumptions:
Years ended December 31, 2003 2002 2001 Dividend yield ...... – – 0.30% Expected price volatility ...... 41% 45% 51% Risk-free interest rate ...... 1.09% 2.14% 1.71% Expected life of options ...... Less than one Less than one Less than one year year year Weighted-average fair value of options granted...... $4.69 $4.76 $7.22
New Accounting Pronouncements—In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement eliminates the requirement under SFAS 4 to aggregate and classify all gains and losses from extinguishment of debt as an extraordinary item, net of related income tax effect. This statement also amends SFAS 13 to require certain lease modifications with economic effects similar to
F-13 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 requires reclassification of gains and losses in all prior periods presented in comparative financial statements related to debt extinguishment that do not meet the criteria for extraordinary item in APB 30. The statement is effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. The Company adopted SFAS 145 effective January 1, 2003. As a result of the adoption of this statement, the Company’s results of operations for the year ended December 31, 2001 included $28.8 million ($0.09 per diluted share) related to the loss on early retirement of debt previously classified as an extraordinary item.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which is effective for fiscal years ending after December 15, 2002. SFAS 148 amends SFAS 123 to permit two additional transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic method under APB 25. The prospective method of transition under SFAS 123 is an option for entities adopting the recognition provisions of SFAS 123 in a fiscal year beginning before December 15, 2003. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements concerning the method of accounting used for stock-based employee compensation and the effects of that method on reported results of operations. Under SFAS 148, pro forma disclosures are required in a specific tabular format in the “Summary of Significant Accounting Policies.” The Company adopted the disclosure requirements of this statement as of December 31, 2002. The adoption of the disclosure requirements had no effect on the Company’s consolidated financial position or results of operations. The Company adopted the fair value method of accounting for stock-based compensation using the prospective method of transition under SFAS 123 effective January 1, 2003. Compensation expense in 2003 increased approximately $4.3 million ($0.01 per diluted share), net of tax of $1.8 million, as of result of adoption. See “—Stock-Based Compensation.”
In January 2003, the FASB issued Interpretation (“FIN”) 46, Consolidation of Variable Interest Entities. FIN 46 requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. The provisions of FIN 46 were effective immediately for those variable interest entities created after January 31, 2003. The provisions, as amended December 2003, are effective for the first interim or annual period ending after December 15, 2003 for those variable interest entities held prior to February 1, 2003 that are considered to be special purpose entities. The provisions, as amended, are to be applied no later than the end of the first reporting period that ends after March 15, 2004 for all other variable interest entities held prior to February 1, 2003. The Company adopted and applied the provisions of FIN 46, as revised December 31, 2003, effective December 31, 2003 for all variable interest entities.
At December 31, 2003, through TODCO, the Company had a 25 percent ownership interest in Delta Towing, a joint venture established for the purpose of owning and operating inland and shallow water marine support vessel equipment. See Note 20. Delta Towing is considered a variable interest entity as its equity is not sufficient to absorb its expected losses. Because TODCO has the largest percentage of investment at risk through the notes receivable, TODCO would absorb the majority of the joint venture’s expected losses; therefore, TODCO is deemed to be the primary beneficiary of Delta Towing for accounting purposes. As such, TODCO consolidated Delta Towing effective December 31, 2003 and the consolidation resulted in an increase in net assets and a corresponding gain as a cumulative effect of a change in accounting principle of approximately $0.8 million.
The Company is party to a sale/leaseback agreement for the semisubmersible drilling rig M.G. Hulme, Jr. with an unrelated third party leasing company (see Note 15). Under the sale/leaseback agreement, the Company has the option to purchase the semisubmersible drilling rig at the end of the lease for a maximum amount of approximately $35.7 million. Because the sale/leaseback agreement is with an entity in which the Company has no direct investment, the Company is not entitled to receive the financial statements of the leasing entity and the equity holders of the leasing company will not release the financial statements or other financial information in order for the Company to make the determination of whether the entity is a variable interest entity. In addition, without the financial statements, the Company is unable to determine if it is the primary beneficiary of the entity and, if so, what it would consolidate. The Company has no exposure to loss as a result of the sale/leaseback agreement. The Company has incurred rig rental expense related to the sale/leaseback agreement of $12.5 million, $12.6 million and $11.9 million during each of the years ended December 31, 2003, 2002 and 2001, respectively. The Company currently accounts for the lease of this semisubmersible drilling rig as an operating lease.
Effective January 2003, the Company implemented Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenues Gross as a Principal versus Net as an Agent. As a result of the implementation of the EITF, the costs incurred and charged to the Company’s customers on a reimbursable basis are recognized as operating and maintenance expense. In addition,
F-14 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
the amounts billed to the Company’s customers associated with these reimbursable costs are being recognized as client reimbursable revenue. The increase in client reimbursable revenues and operating and maintenance expense was $100.5 million in 2003 as a result of the implementation of EITF 99-19. The change in accounting principle had no effect on the Company’s results of operations or consolidated financial position. Prior period amounts have not been reclassified, as these amounts were not material.
Reclassifications—Certain reclassifications have been made to prior period amounts to conform with the current year presentation.
Note 3—Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) at December 31, 2003 and 2002, net of tax, are as follows (in millions):
Gain on Unrealized Other Total Terminated Gains Comprehensive Other Interest on Available- Loss Related to Minimum Comprehensive Rate for-Sale Unconsolidated Pension Income Swaps Securities Joint Venture Liability (Loss) Balance at December 31, 2000 ...... $ − $ − $ − $ − $ − Other comprehensive income (loss)...... 3.9 (0.6) (5.6) − (2.3) Balance at December 31, 2001 ...... 3.9 (0.6) (5.6) − (2.3) Other comprehensive income (loss)...... (0.3) − 3.6 (32.5) (29.2) Balance at December 31, 2002 ...... 3.6 (0.6) (2.0) (32.5) (31.5) Other comprehensive income (loss)...... (0.2) 0.2 2.0 9.3 11.3 Balance at December 31, 2003 ...... $ 3.4 $ (0.4) $ − $ (23.2) $(20.2)
Deepwater Drilling L.L.C. (“DD LLC”), a previously unconsolidated subsidiary in which the Company had a 50 percent ownership interest, entered into interest rate swaps with aggregate market values netting to a $6.7 million liability at December 31, 2002 (see Note 18). The Company's interest in these swaps was recorded as other comprehensive loss related to unconsolidated joint venture. These swaps expired in October 2003 (see Note 10).
Note 4—Business Combination
On January 31, 2001, the Company completed a merger transaction with R&B Falcon, in which an indirect wholly owned subsidiary of the Company merged with and into R&B Falcon. As a result of the merger, R&B Falcon common shareholders received 0.5 newly issued ordinary shares of the Company for each R&B Falcon share. The Company issued approximately 106 million ordinary shares in exchange for the issued and outstanding shares of R&B Falcon and assumed warrants and options exercisable for approximately 13 million ordinary shares. The ordinary shares issued in exchange for the issued and outstanding shares of R&B Falcon constituted approximately 33 percent of the Company's outstanding ordinary shares after the merger.
The Company accounted for the merger using the purchase method of accounting with the Company treated as the accounting acquiror. The purchase price of $6.7 billion was comprised of the calculated market capitalization of the Company's ordinary shares issued at the time of merger with R&B Falcon of $6.1 billion and the estimated fair value of R&B Falcon stock options and warrants at the time of the merger of $0.6 billion. The market capitalization of the Company's ordinary shares issued was calculated using the average closing price of the Company's ordinary shares for a period immediately before and after August 21, 2000, the date the merger was announced.
The purchase price included, at estimated fair value at January 31, 2001, current assets of $672 million, drilling and other property and equipment of $4,010 million, other assets of $160 million and the assumption of current liabilities of $338 million, other net long-term liabilities of $242 million and long-term debt of $3,206 million. The excess of the purchase price over the estimated fair value of net assets acquired was $5,630 million, which was accounted for as goodwill and is reviewed for impairment annually in accordance with SFAS 142. See Note 2.
F-15 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In conjunction with the R&B Falcon merger, the Company established a liability of $16.5 million for the estimated severance-related costs associated with the involuntary termination of 569 R&B Falcon employees pursuant to management's plan to consolidate operations and administrative functions post-merger. Included in the 569 planned involuntary terminations were 387 employees engaged in the Company's land drilling business in Venezuela. The Company suspended active marketing efforts to divest this business and, as a result, the estimated liability was reduced by $4.3 million in the third quarter of 2001 with an offset to goodwill. Through December 31, 2002, all required severance-related costs were paid to 182 employees whose positions were eliminated as a result of this plan.
Unaudited pro forma combined operating results of the Company and R&B Falcon assuming the R&B Falcon merger was completed as of January 1, 2001 for the year ended December 31, 2001 are as follows (in millions, except per share data):
Operating revenues ...... $2,946.0 Operating income...... 553.9 Income from continuing operations ...... 260.2 Earnings per share: Basic ...... $ 0.82 Diluted ...... $ 0.80
The pro forma information includes adjustments for additional depreciation based on the fair market value of the drilling and other property and equipment acquired, amortization of goodwill arising from the transaction, increased interest expense for debt assumed in the merger and related adjustments for income taxes. The pro forma information is not necessarily indicative of the results of operations had the transaction been effected on the assumed dates or the results of operations for any future periods.
Note 5—Capital Expenditures and Other Asset Acquisitions
Capital expenditures totaled $495.9 million during the year ended December 31, 2003 and included the Company’s acquisition of two Fifth-Generation Deepwater Floaters, the Deepwater Pathfinder and Deepwater Frontier, through the payoff of synthetic lease financing arrangements totaling $382.8 million. The remaining $113.1 million related to capital expenditures for existing fleet and corporate infrastructure. A substantial majority of the capital expenditures in 2003 related to the Transocean Drilling segment.
Capital expenditures totaled $141.0 million during the year ended December 31, 2002 and related to the Company’s existing fleet and corporate infrastructure. A substantial majority of the capital expenditures in 2002 related to the Transocean Drilling segment.
Capital expenditures, including capitalized interest, totaled $506.2 million during the year ended December 31, 2001 and included approximately $175.0 million, $42.0 million, $41.0 million and $24.0 million spent on the construction of the Deepwater Horizon, Sedco Energy, Sedco Express and Cajun Express, respectively. A substantial majority of the capital expenditures in 2001 related to the Transocean Drilling segment. The Company's construction program was completed as of December 31, 2001.
As a result of the R&B Falcon merger, the Company acquired ownership interests in two unconsolidated joint ventures, 50 percent in DD LLC and 60 percent in Deepwater Drilling II L.L.C. (“DDII LLC”). Subsidiaries of ConocoPhillips owned the remaining interests in these joint ventures. Each of the joint ventures was a lessee in a synthetic lease financing facility entered into in connection with the construction of the Deepwater Pathfinder, in the case of DD LLC, and the Deepwater Frontier, in the case of DDII LLC. Pursuant to the lease financings, the rigs were owned by special purpose entities and leased to the joint ventures.
In May 2003, WestLB AG, one of the lenders in the Deepwater Frontier synthetic lease financing facility, assigned its $46.1 million remaining promissory note receivable to the Company in exchange for cash of $46.1 million. Also in May 2003, but subsequent to the WestLB AG assignment, the Company purchased ConocoPhillips’ 40 percent interest in DDII LLC for approximately $5.0 million. As a result of this purchase, the Company consolidated DDII LLC late in the second quarter of 2003. In addition, the Company acquired certain drilling and other contracts from ConocoPhillips for approximately $9.0 million in cash. In December 2003, DDII LLC prepaid the remaining $197.5 million debt and equity principal amounts owed,
F-16 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
plus accrued and unpaid interest, to the Company and other lenders under the synthetic lease financing facility. As a result of this prepayment, DDII LLC became the legal owner of the Deepwater Frontier.
In November 2003, the Company purchased the remaining 25 percent minority interest in the Caspian Sea Ventures International Limited (“CSVI”) joint venture. CSVI owns the jackup rig Trident 20 and is now a wholly owned subsidiary of the Company.
In December 2003, the Company purchased ConocoPhillips’ 50 percent interest in DD LLC in connection with the payoff of the Deepwater Pathfinder synthetic lease financing facility. As a result of this purchase, the Company consolidated DD LLC late in the fourth quarter of 2003. Concurrent with the purchase of this ownership interest, DD LLC prepaid the remaining $185.3 million debt and equity principal amounts owed, plus accrued and unpaid interest, to the lenders under the synthetic lease financing facility. As a result of this prepayment, DD LLC became the legal owner of the Deepwater Pathfinder.
Note 6—Asset Dispositions
In January 2003, in the Transocean Drilling segment, the Company completed the sale of a jackup rig, the RBF 160, for net proceeds of $13.1 million and recognized a gain of $0.2 million, net of tax of $0.1 million. The proceeds were received in December 2002.
During the year ended December 31, 2003, the Company settled an insurance claim and sold certain other assets for net proceeds of approximately $8.4 million and recorded net gains of $4.0 million ($0.01 per diluted share), net of tax of $0.6 million, in the Transocean Drilling segment and $0.6 million, net of tax of $0.3 million, in its TODCO segment.
During the year ended December 31, 2002, in the Transocean Drilling segment, the Company sold the jackup rig RBF 209 and two semisubmersible rigs, the Transocean 96 and Transocean 97, for net proceeds of $49.4 million and recognized net losses of $0.3 million, net of tax of $0.1 million.
During the year ended December 31, 2002, the Company settled an insurance claim and sold certain other assets for net proceeds of approximately $38.9 million and recorded net gains of $2.8 million ($0.01 per diluted share), net of tax of $0.3 million, and $0.6 million, net of tax of $0.4 million, in the Transocean Drilling and TODCO segments, respectively.
In December 2001, in the Transocean Drilling segment, the Company sold RBF FPSO L.P., which owned the Seillean, a multi-purpose service vessel. The Company received net proceeds from the sale of $85.6 million and recorded a net gain of $17.1 million ($0.05 per diluted share), net of tax of $9.2 million, for the year ended December 31, 2001.
In February 2001, in the Transocean Drilling segment, Sea Wolf Drilling Limited (“Sea Wolf”), a joint venture in which the Company held a 25 percent interest, sold two semisubmersible rigs, the Drill Star and Sedco Explorer, to Pride International, Inc. In the first quarter of 2001, the Company recognized accelerated amortization of the after-tax deferred gain related to the Sedco Explorer of $18.5 million ($0.06 per diluted share), which was included in gain from sale of assets. The Company's bareboat charter with Sea Wolf on the Sedco Explorer was terminated effective June 2000. The Company continued to operate the Drill Star, which was renamed the Pride North Atlantic, under a bareboat charter agreement until October 2001, at which time the rig was returned to its owner. The amortization of the Drill Star's deferred gain was accelerated and produced incremental after-tax gains in 2001 of $36.3 million ($0.12 per diluted share), which was included as a reduction in operating and maintenance expense.
During the year ended December 31, 2001, the Company sold certain other assets acquired in the R&B Falcon merger and certain other assets held for sale. The Company received net proceeds of approximately $116.1 million, and recorded net gains of $5.1 million ($0.02 per diluted share), net of tax of $0.8 million, and $3.8 million ($0.01 million per diluted share), net of tax of $2.0 million, in the Transocean Drilling and TODCO segments, respectively.
Note 7—Impairment Loss on Long-Lived Assets
During the year ended December 31, 2003, the Company recorded non-cash impairment charges of $6.9 million ($0.02 per diluted share), net of tax of $3.7 million, in the TODCO segment as a result of the Company’s decision to take five jackup rigs out of drilling service and market the rigs for alternative uses. The Company does not anticipate returning these rigs to drilling service as it is believed to be cost prohibitive. In accordance with SFAS 144, the carrying value of these assets was adjusted to fair market value. The fair market values of these units as non-drilling rigs were based on third party valuations. The
F-17 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Company also recorded a non-cash impairment charge in this segment of $0.5 million, net of tax of $0.2 million, related to its approximate 12 percent investment in Energy Virtual Partners, LP and Energy Virtual Partners Inc. The impairment resulted from the Company’s determination that the fair value of the assets of those entities did not support its carrying value, which is included in investments in and advances to joint ventures in the Company’s consolidated balance sheets. The impairment was determined and measured based on the remaining book value of the Company’s investment, management’s assessment of the fair value of that investment at the time the decision was made and the amount received upon liquidation of the assets of the investment.
During the year ended December 31, 2003, the Company recorded an after-tax, non-cash impairment charge of $4.2 million ($0.01 per diluted share) related to assets held and used in the Transocean Drilling segment as a result of the Company’s decision to remove one mid-water semisubmersible rig and one self-erecting tender rig from drilling service. The impairment was determined and measured based on an estimate of fair value derived from an offer from a potential buyer. The Company also recorded an after-tax, non-cash impairment charge of $1.0 million in this segment as a result of the Company’s decision to discontinue its leases on its oil and gas properties. The impairment was determined and measured based on the remaining book value of the assets and management’s assessment of the fair value at the time the decision was made.
In 2002, the Company recorded non-cash impairment charges of $18.6 million ($0.06 per diluted share), net of tax of $9.9 million, and $10.6 million ($0.03 per diluted share), net of tax of $5.7 million, in its Transocean Drilling and TODCO segments, respectively, relating to the reclassification of assets held for sale to assets held and used. The impairment of these assets resulted from management's assessment that they no longer met the held for sale criteria under SFAS 144. In accordance with SFAS 144, the carrying value of these assets was adjusted to the lower of fair market value or carrying value adjusted for depreciation from the date the assets were classified as held for sale. The fair market values of these assets were based on third party valuations.
During the fourth quarter of 2002, the Company performed its annual test of goodwill impairment as of October 1, 2002. As a result of that test and a general decline in market conditions, the Company recorded non-cash impairments of $2,494.1 million ($7.82 per diluted share) and $381.9 million ($1.20 per diluted share) in its Transocean Drilling and TODCO segments, respectively. See Note 2.
In 2002, the Company recorded non-cash impairment charges in its Transocean Drilling and TODCO segments of $3.6 million ($0.01 per diluted share), net of tax of $1.9 million, and $0.7 million, net of tax of $0.4 million, respectively, related to assets held for sale, which resulted from deterioration in market conditions. The impairments were determined and measured based on an estimate of fair value derived from offers from potential buyers.
During the fourth quarter 2001, the Company recorded non-cash impairment charges in its Transocean Drilling and TODCO segments of $30.4 million ($0.10 per diluted share), net of tax of $9.0 million, and $0.7 million, net of tax of $0.3 million, respectively. In the Transocean Drilling segment, the impairment related to assets held for sale and certain assets held and used of $18.6 million, net of tax of $9.0 million, and $11.8 million, respectively. In the TODCO segment, the impairment related to certain assets held and used. The impairments resulted from deterioration in market conditions. The methodology used in determining the fair market value included third party appraisals and industry experience for assets held and used and offers from potential buyers for assets held for sale.
F-18 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8—Debt
Debt, net of unamortized discounts, premiums and fair value adjustments, is comprised of the following (in millions):
December 31, 2003 2002
6.5% Senior Notes, due April 2003 ...... $ − $ 239.7 9.125% Senior Notes, due December 2003 ...... − 89.5 Amortizing Term Loan Agreement – final maturity December 2004 ...... − 300.0 6.75% Senior Notes, due April 2005 (a) ...... 361.2 371.8 7.31% Nautilus Class A1 Amortizing Notes – final maturity May 2005 ...... 63.6 104.7 9.41% Nautilus Class A2 Notes, due May 2005 ...... − 51.7 6.95% Senior Notes, due April 2008 (a) ...... 269.5 277.2 9.5% Senior Notes, due December 2008 (a) ...... 357.3 371.8 $800 Million Revolving Credit Agreement – final maturity December 2008 ...... 250.0 − 6.625% Notes, due April 2011 (b) ...... 797.3 803.7 7.375% Senior Notes, due April 2018 ...... 250.4 250.5 Zero Coupon Convertible Debentures, due May 2020 (put options exercisable May 2008 and May 2013) (c) ...... 16.5 527.2 1.5% Convertible Debentures, due May 2021 (put options exercisable May 2006, May 2011 and May 2016) ...... 400.0 400.0 8% Debentures, due April 2027 ...... 198.1 198.0 7.45% Notes, due April 2027 (put options exercisable April 2007) ...... 94.8 94.6 7.5% Notes, due April 2031 ...... 597.5 597.4 Other ...... 1.9 0.2 Total Debt ...... 3,658.1 4,678.0 Less Debt Due Within One Year (c) ...... 45.8 1,048.1 Total Long-Term Debt ...... $3,612.3 $3,629.9
(a) At December 31, 2002, the Company was a party to interest rate swap agreements with respect to these debt instruments. These interest rate swap agreements were terminated in January 2003. See Note 10. (b) At December 31, 2002, the Company was a party to interest rate swap agreements with respect to these debt instruments. These interest rate swap agreements were terminated in March 2003. See Note 10. (c) At December 31, 2002, the Zero Coupon Convertible Debentures were classified as debt due within one year since the put options were exercisable in May 2003. At December 31, 2003, the remaining balance of the debentures not put back to the Company in May 2003 was classified as long-term debt.
The scheduled maturity of the Company's debt, at face value, assumes the bondholders exercise their options to require the Company to repurchase the 1.5% Convertible Debentures, 7.45% Notes and Zero Coupon Convertible Debentures in May 2006, April 2007 and May 2008, respectively, and is as follows (in millions):
Years ending December 31,
2004 ...... $ 45.8 2005 ...... 370.3 2006 ...... 400.0 2007 ...... 100.0 2008 ...... 819.0 Thereafter...... 1,750.0 Total ...... $3,485.1
F-19 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Commercial Paper ProgramThe Company has a revolving credit agreement, described below, which, together with previous revolving credit agreements, provided liquidity through commercial paper borrowings during 2002 and 2003. At December 31, 2003, no amounts were outstanding under the Commercial Paper Program.
Revolving Credit Agreements—The Company is party to an $800.0 million five-year revolving credit agreement (the “Revolving Credit Agreement”) dated December 16, 2003. This revolving credit agreement replaced the previously existing $550.0 million five-year revolving credit agreement dated December 29, 2000 and the $250.0 million 364-day revolving credit agreement dated December 26, 2002, which were both terminated effective December 16, 2003. The Revolving Credit Agreement bears interest, at the Company's option, at a base rate or London Interbank Offered Rate (“LIBOR”) plus a margin that can vary from 0.350 percent to 0.950 percent depending on the Company's non-credit enhanced senior unsecured public debt rating. At December 31, 2003, the applicable margin was 0.500 percent. A facility fee varying from 0.075 percent to 0.225 percent depending on the Company's non-credit enhanced senior unsecured public debt rating, is incurred on the daily amount of the underlying commitment, whether used or unused, throughout the term of the facility. At December 31, 2003, the applicable facility fee was 0.125 percent. A utilization fee of 0.125 percent is payable if amounts outstanding under the Revolving Credit Agreement are greater than $264.0 million. At December 31, 2003, $250.0 million was outstanding under the Revolving Credit Agreement.
The Revolving Credit Agreement requires compliance with various covenants and provisions customary for agreements of this nature, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest coverage ratio, as defined by the credit agreement, of not less than three to one, a debt to total tangible capital ratio, as defined by the credit agreement, of not greater than 50 percent, and limitations on creating liens, incurring debt, transactions with affiliates, sale/leaseback transactions and mergers and sale of substantially all assets.
6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% Senior Notes and Exchange Offer—In March 2002, the Company completed exchange offers and consent solicitations for TODCO’s 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% Senior Notes (“the Exchange Offer”). As a result of the Exchange Offer, approximately $234.5 million, $342.3 million, $247.8 million, $246.5 million, $76.9 million and $289.8 million principal amount of TODCO’s outstanding 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% Senior Notes, respectively, were exchanged for the Company’s newly issued 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% Senior Notes having the same principal amount, interest rate, redemption terms and payment and maturity dates. Because the holders of a majority in principal amount of each of these series of notes consented to the proposed amendments to the applicable indenture pursuant to which the notes were issued, some covenants, restrictions and events of default were eliminated from the indentures with respect to these series of notes. After the Exchange Offer, approximately $5.0 million, $7.7 million, $2.2 million, $3.5 million, $10.2 million and $10.2 million principal amount of the outstanding 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% Senior Notes, respectively, not exchanged remain the obligation of TODCO (see “— Retired and Repurchased Debt”). These notes are combined with the notes of the corresponding series issued by the Company in the above table. In connection with the Exchange Offer, TODCO paid $8.3 million in consent payments to holders of TODCO’s notes whose notes were exchanged. The consent payments are being amortized as an increase to interest expense over the remaining term of the respective notes and such amortization was approximately $1.3 million in each of the years ended December 31, 2003 and 2002. The 6.75%, 6.95%, 7.375% and 9.5% Senior Notes are redeemable at the Company’s option at a make-whole premium (see Note 25).
1.5% Convertible Debentures—In May 2001, the Company issued $400.0 million aggregate principal amount of 1.5% Convertible Debentures due May 2021. The Company has the right to redeem the debentures after five years for a price equal to 100 percent of the principal. Each holder has the right to require the Company to repurchase the debentures after five, 10 and 15 years at 100 percent of the principal amount. The Company may pay this repurchase price with either cash or ordinary shares or a combination of cash and ordinary shares. The debentures are convertible into ordinary shares of the Company at the option of the holder at any time at a ratio of 13.8627 shares per $1,000 principal amount debenture, subject to adjustments if certain events take place, if the closing sale price per ordinary share exceeds 110 percent of the conversion price for at least 20 trading days in a period of 30 consecutive trading days ending on the trading day immediately prior to the conversion date or if other specified conditions are met. At December 31, 2003, $400.0 million principal amount of these notes was outstanding.
Zero Coupon Convertible Debentures—In May 2000, the Company issued Zero Coupon Convertible Debentures due May 2020 with a face value at maturity of $865.0 million. The debentures were issued to the public at a price of $579.12 per debenture and accrue original issue discount at a rate of 2.75 percent per annum compounded semiannually to reach a face value at maturity of $1,000 per debenture. The Company will pay no interest on the debentures prior to maturity and has the right to redeem the debentures after three years for a price equal to the issuance price plus accrued original issue discount to the date of redemption. Each holder has the right to require the Company to repurchase the debentures on the third, eighth and thirteenth
F-20 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
anniversary of issuance at the issuance price plus accrued original issue discount to the date of repurchase (see “—Retired and Repurchased Debt”). The Company may pay this repurchase price with either cash or ordinary shares or a combination of cash and ordinary shares. The debentures are convertible into ordinary shares of the Company at the option of the holder at any time at a ratio of 8.1566 shares per debenture subject to adjustments if certain events take place. At December 31, 2003, $26.4 million face value of these notes was outstanding with a discounted value of $16.8 million. Should all of the debentures be put to the Company in May 2008, the debentures will have a discounted value of $19.0 million.
Retired and Repurchased Debt—In December 2003, the Company repaid all of the $87.1 million principal amount outstanding 9.125% Senior Notes, of which $10.2 million principal amount outstanding was the obligation of TODCO, plus accrued and unpaid interest, in accordance with their scheduled maturity. The Company funded the repayment from existing cash balances.
In December 2003, the Company repaid the remaining $187.5 million principal amount outstanding under the Term Loan Agreement, plus accrued and unpaid interest, of which $150.0 million related to the early retirement of this debt. The Term Loan Agreement was terminated in conjunction with this repayment. The Company funded the repayment from existing cash balances.
In May 2003, the Company repurchased and retired all of the $50.0 million principal amount outstanding 9.41% Nautilus Class A2 Notes due May 2005 and funded the repurchase from existing cash balances. The Company recognized a loss on the early retirement of debt of approximately $3.6 million ($0.01 per diluted share), net of tax of $1.9 million, in the second quarter of 2003.
In May 2003, holders of the Company’s Zero Coupon Convertible Debentures due May 24, 2020 had the option to require the Company to repurchase their debentures. Holders of $838.6 million aggregate principal amount, or approximately 97 percent, of these debentures exercised this option and the Company repurchased their debentures at a repurchase price of $628.57 per $1,000 principal amount. Under the terms of the debentures, the Company had the option to pay for the debentures with cash, the Company’s ordinary shares, or a combination of cash and shares, and elected to pay the $527.2 million repurchase price from existing cash balances. The Company recognized additional expense of approximately $10.2 million ($0.03 per diluted share) as an after-tax loss on retirement of debt in the second quarter of 2003 to fully amortize the remaining debt issue costs related to the repurchased debentures.
In April 2003, the Company repaid the entire $239.5 million principal amount outstanding 6.5% Senior Notes, of which $5.0 million principal amount outstanding was the obligation of TODCO, plus accrued and unpaid interest, in accordance with their scheduled maturity. The Company funded the repayment from existing cash balances.
Note 9—Financial Instruments and Risk Concentration
Foreign Exchange Risk—The Company's international operations expose the Company to foreign exchange risk. This risk is primarily associated with compensation costs denominated in currencies other than the U.S. dollar and with purchases from foreign suppliers. The Company uses a variety of techniques to minimize exposure to foreign exchange risk, including customer contract payment terms and foreign exchange derivative instruments.
The Company's primary foreign exchange risk management strategy involves structuring customer contracts to provide for payment in both U.S. dollars and local currency. The payment portion denominated in local currency is based on anticipated local currency requirements over the contract term. Due to various factors, including local banking laws, other statutory requirements, local currency convertibility and the impact of inflation on local costs, actual foreign exchange needs may vary from those anticipated in the customer contracts, resulting in partial exposure to foreign exchange risk. Fluctuations in foreign currencies typically have minimal impact on overall results. In situations where payments of local currency do not equal local currency requirements, foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases may be used. A foreign exchange forward contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange.
The Company does not enter into derivative transactions for speculative purposes. At December 31, 2003, the Company had no material open foreign exchange contracts.
F-21 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In January 2003, Venezuela implemented foreign exchange controls that limit the Company’s ability to convert local currency into U.S. dollars and transfer excess funds out of Venezuela. The Company’s drilling contracts in Venezuela typically call for payments to be made in local currency, even when the dayrate is denominated in U.S. dollars. The exchange controls could also result in an artificially high value being placed on the local currency. As a result, the Company recognized a loss of $1.5 million, net of tax of $0.8 million, on the revaluation of the local currency into functional U.S. dollars during the second quarter of 2003. In the third quarter of 2003, to limit its exposure, the Company entered into an interim arrangement with one of its customers in which the Company is to receive 55 percent of the billed receivables in U.S. dollars with the remainder paid in local currency.
Gains and losses on foreign exchange derivative instruments, which qualify as accounting hedges, are deferred as other comprehensive income and recognized when the underlying foreign exchange exposure is realized. Gains and losses on foreign exchange derivative instruments, which do not qualify as hedges for accounting purposes, are recognized currently based on the change in market value of the derivative instruments. At December 31, 2003 and 2002, the Company did not have any foreign exchange derivative instruments not qualifying as accounting hedges.
Interest Rate Risk—The Company's use of debt directly exposes the Company to interest rate risk. Floating rate debt, where the interest rate can be changed every year or less over the life of the instrument, exposes the Company to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument and the instrument's maturity is greater than one year, exposes the Company to changes in market interest rates should the Company refinance maturing debt with new debt.
In addition, the Company is exposed to interest rate risk in its cash investments, as the interest rates on these investments change with market interest rates.
The Company, from time to time, may use interest rate swap agreements to manage the effect of interest rate changes on future income. These derivatives are used as hedges and are not used for speculative or trading purposes. Interest rate swaps are designated as a hedge of underlying future interest payments. These agreements involve the exchange of amounts based on variable interest rates and amounts based on a fixed interest rate over the life of the agreement without an exchange of the notional amount upon which the payments are based. The interest rate differential to be received or paid on the swaps is recognized over the lives of the swaps as an adjustment to interest expense. Gains and losses on terminations of interest rate swap agreements are deferred and recognized as an adjustment to interest expense over the remaining life of the underlying debt. In the event of the early retirement of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income.
The major risks in using interest rate derivatives include changes in interest rates affecting the value of such instruments, potential increases in interest expense of the Company due to market increases in floating interest rates in the case of derivatives that exchange fixed interest rates for floating interest rates and the credit worthiness of the counterparties in such transactions.
The Company has entered into interest rate swap transactions hedging debt. These interest rate swap transactions, however, have all been terminated as of December 31, 2003. See Note 10. The Company has not hedged any of its other assets or liabilities against interest rate movements.
The market value of the Company's swaps is carried on its consolidated balance sheet as an asset or liability depending on the movement of interest rates after the transaction is entered into and depending on the security being hedged. Because the Company's swaps are considered to be perfectly effective, the carrying value of the debt being hedged is adjusted for the market value of the swaps.
Should a counterparty default at a time in which the market value of the swap with that counterparty is classified as an asset in the Company's consolidated balance sheet, the Company may be unable to collect on that asset. To mitigate such risk of failure, the Company enters into swap transactions with a diverse group of high-quality institutions.
Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, trade receivables, swap receivables and, prior to December 31, 2003, notes receivable from Delta Towing (see Notes 2 and 10). It is the Company's practice to place its cash and cash equivalents in time deposits at commercial banks with high credit ratings or mutual funds, which invest exclusively in high quality money market instruments. In foreign
F-22 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
locations, local financial institutions are generally utilized for local currency needs. The Company limits the amount of exposure to any one institution and does not believe it is exposed to any significant credit risk.
The Company derives the majority of its revenue from services to international oil companies and government-owned and government-controlled oil companies. Receivables are dispersed in various countries. See Note 19. The Company maintains an allowance for doubtful accounts receivable based upon expected collectibility. The Company is not aware of any significant credit risks relating to its customer base and does not generally require collateral or other security to support customer receivables.
Labor Agreements—On a worldwide basis, excluding TODCO employees, approximately 24 percent of the Company’s employees worked under collective bargaining agreements at December 31, 2003, most of whom worked in Brazil, Norway, U.K. and Nigeria. Of these represented employees, substantially all are working under agreements that are subject to salary negotiation in 2004.
At December 31, 2003, approximately five percent of TODCO employees worked under collective bargaining agreements in Trinidad and Venezuela.
Note 10—Interest Rate Swaps
In June 2001, the Company entered into interest rate swap agreements in the aggregate notional amount of $700.0 million with a group of banks relating to the Company’s $700.0 million aggregate principal amount of 6.625% Notes due April 2011. In February 2002, the Company entered into interest rate swap agreements with a group of banks in the aggregate notional amount of $900.0 million relating to the Company’s $350.0 million aggregate principal amount of 6.75% Senior Notes due April 2005, $250.0 million aggregate principal amount of 6.95% Senior Notes due April 2008 and $300.0 million aggregate principal amount of 9.5% Senior Notes due December 2008. The objective of each transaction was to protect the debt against changes in fair value due to changes in the benchmark interest rate. Under each interest rate swap, the Company received the fixed rate equal to the coupon of the hedged item and paid LIBOR plus a margin of 50 basis points, 246 basis points, 171 basis points and 413 basis points, respectively, which were designated as the respective benchmark interest rates, on each of the interest payment dates until maturity of the respective notes. The hedges were considered perfectly effective against changes in the fair value of the debt due to changes in the benchmark interest rates over their term. As a result, the shortcut method applied and there was no requirement to periodically reassess the effectiveness of the hedges during the term of the swaps.
In January 2003, the Company terminated the swaps with respect to its 6.75%, 6.95% and 9.5% Senior Notes. In March 2003, the Company terminated the swaps with respect to its 6.625% Notes. As a result of these terminations, the Company received cash proceeds, net of accrued interest, of approximately $173.5 million that was recognized as a fair value adjustment to long-term debt in the Company’s consolidated balance sheet and is being amortized as a reduction to interest expense over the life of the underlying debt. Such reduction amounted to approximately $23.1 million ($0.07 per diluted share) in 2003 and is expected to be approximately $27.2 million ($0.08 per diluted share) in 2004.
At December 31, 2003, the Company had no outstanding interest rate swaps. At December 31, 2002, the Company had outstanding interest rate swaps in the aggregate notional amount of $1.6 billion. The market value of the Company's outstanding interest rate swaps was included in other assets with corresponding increases to long-term debt as follows at December 31, 2002 (in millions):
6.75% Senior Notes, due April 2005 ...... $ 18.7 6.95% Senior Notes, due April 2008 ...... 25.3 9.5% Senior Notes, due December 2008 ...... 30.6 6.625% Notes, due April 2011 ...... 106.7 $181.3
DD LLC, a previously unconsolidated joint venture in which the Company had a 50 percent ownership interest, entered into interest rate swaps in August 1998 that expired in October 2003 (see Note 6). The Company's interest in these swaps was included in accumulated other comprehensive income, net of tax, with corresponding reductions to deferred income taxes and investments in and advances to joint ventures.
F-23 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 11—Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents and trade receivables—The carrying amounts approximate fair value because of the short maturity of those instruments.
Swap receivablesThe carrying value of swap receivables are adjusted to estimated market value based on current and forward LIBOR rates. The Company had no outstanding swap receivables at December 31, 2003 (see Note 10).
Notes receivable from related party—The fair value of notes receivable from related party with a carrying amount of $82.8 million at December 31, 2002 could not be determined because there is no available market price for such notes. Due to the adoption of FIN 46 and the consolidation of the related party, the notes receivable have been eliminated in consolidation. See Notes 2 and 21.
Debt—The fair value of the Company's fixed rate debt is calculated based on the estimated yield to maturity. The carrying value of variable rate debt approximates fair value.
December 31, 2003 December 31, 2002 Carrying Carrying Amount Fair Value Amount Fair Value Cash and cash equivalents...... $ 474.0 $ 474.0 $1,214.2 $1,214.2 Trade receivables...... 435.3 435.3 437.6 437.6 Swap receivables ...... − − 181.3 181.3 Debt ...... 3,658.1 3,849.8 4,678.0 4,848.5
Note 12—Other Current Liabilities
Other current liabilities are comprised of the following (in millions):
December 31, 2003 2002
Accrued Payroll and Employee Benefits...... $133.0 $143.6 Accrued Interest ...... 39.2 32.2 Deferred Income...... 35.7 31.1 Reserves for Contingent Liabilities...... 17.5 22.9 Accrued Taxes, Other than Income...... 12.7 19.3 Other...... 23.9 13.1 Total Other Current Liabilities...... $262.0 $262.2
Note 13—Supplementary Cash Flow Information
Non-cash investing activities for the years ended December 31, 2003, 2002 and 2001 included $8.9 million, $7.9 million and $11.8 million, respectively, related to accruals of capital expenditures. The accruals have been reflected in the consolidated balance sheet as an increase in property and equipment, net and accounts payable.
In 2002, the Company reclassified the remaining assets that had not been disposed of from assets held for sale to property and equipment based on management's assessment that these assets no longer met the held for sale criteria under SFAS 144. As a result, $55.0 million was reflected as an increase in property and equipment with a corresponding decrease in other assets.
F-24 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Non-cash financing activities for the year ended December 31, 2001 included $6.7 billion related to the Company's ordinary shares issued in connection with the R&B Falcon merger. Non-cash investing activities for the year ended December 31, 2001 included $6.4 billion of net assets acquired in the R&B Falcon merger.
Concurrent with and subsequent to the R&B Falcon merger, the Company removed certain non-strategic assets from the active rig fleet and categorized them as assets held for sale. These reclassifications were reflected in the December 31, 2001 consolidated balance sheet as a decrease in property and equipment, net of $177.8 million, with a corresponding increase in other assets.
In February 2001, the Company received a distribution from a joint venture in the form of marketable securities held for sale valued at $19.9 million. The distribution was reflected in the consolidated balance sheet as an increase in other current assets with a corresponding decrease in investments in and advances to joint ventures.
Cash payments for interest were $219.0 million, $210.5 million and $190.6 million for the years ended December 31, 2003, 2002 and 2001, respectively. Cash payments for income taxes, net, were $73.4 million, $91.1 million and $122.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Note 14—Income Taxes
Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. There is no expected relationship between the provision for or benefit from income taxes and income or loss before income taxes because the countries have taxation regimes that vary not only with respect to nominal rate, but also in terms of the availability of deductions, credits and other benefits. Variations also arise because income earned and taxed in any particular country or countries may fluctuate from year to year. Transocean Inc., a Cayman Islands company, is not subject to income tax in the Cayman Islands.
In June 2003, the Company recorded a $14.6 million ($0.04 per diluted share) foreign tax benefit attributable to the favorable resolution of a non-U.S. income tax liability.
During 2002, the Company recorded a $175.7 million ($0.55 per diluted share) tax benefit attributable to the restructuring of certain non-U.S. operations. As a result of the restructuring, previously unrecognized losses were offset against deferred gains, resulting in a reduction of noncurrent deferred taxes payable.
The components of the provision (benefit) for income taxes are as follows (in millions):
Years ended December 31, 2003 2002 2001
Current Provision ...... $ 101.5 $ 101.4 $174.4 Deferred (Benefit) ...... (98.5) (224.4) (98.2) Income Tax Provision (Benefit) before Cumulative Effect of Changes in Accounting Principles ...... $ 3.0 $(123.0) $ 76.2
F-25 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Significant components of deferred tax assets and liabilities are as follows (in millions):
December 31, 2003 2002 Deferred Tax Assets−Current Accrued personnel taxes...... $ 1.1 $ 1.7 Accrued workers' compensation insurance...... 6.8 4.6 Other accruals...... 4.1 9.1 Insurance accruals ...... 14.3 5.7 Other ...... 18.2 5.4 Total Current Deferred Tax Assets...... 44.5 26.5
Deferred Tax Liabilities−Current Deferred drydock...... (3.5) (4.6) Total Current Deferred Tax Liabilities ...... (3.5) (4.6) Net Current Deferred Tax Assets...... $ 41.0 $ 21.9
Deferred Tax Assets−Noncurrent−non-U.S. Net operating loss carryforwards−non-U.S...... $ 28.2 $ 26.2 Net Noncurrent Deferred Tax Assets−non-U.S...... $ 28.2 $ 26.2
Deferred Tax Assets−Noncurrent Net operating loss and other miscellaneous carryforwards ...... $619.1 $ 380.3 Foreign tax credit carryforwards ...... 259.2 216.9 Retirement and benefit plan accruals...... 3.8 7.9 Other accruals...... 35.6 11.5 Deferred income and other ...... 0.7 29.5 Valuation allowance for noncurrent deferred tax assets...... (154.9) (112.3) Total Noncurrent Deferred Tax Assets...... 763.5 533.8
Deferred Tax Liabilities−Noncurrent Depreciation and amortization...... (689.0) (558.9) Investment in subsidiaries ...... (109.3) (67.7) Other...... (8.0) (14.4) Total Noncurrent Deferred Tax Liabilities ...... (806.3) (641.0) Net Noncurrent Deferred Tax Liabilities...... $ (42.8) $(107.2)
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company's assets and liabilities using the applicable tax rates in effect at year end. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized.
The Company provided a valuation allowance to offset deferred tax assets on net operating losses incurred during the year in certain jurisdictions where, in the opinion of management, it is more likely than not that the financial statement benefit of these losses would not be realized. The Company has also provided a valuation allowance for foreign tax credit carryforwards reflecting the possible expiration of their benefits prior to their utilization. At December 31, 2001, the Company’s valuation allowance was $90.7 million. The valuation allowance for non-current deferred tax assets increased $42.6 million and $21.6 million during the years ended December 31, 2003 and 2002, respectively.
The Company's U.S. net operating loss carryforwards expire between 2004 and 2023. The tax effect of the U.S. net operating loss carryforwards was $580.9 million at December 31, 2003. The Company's U.K. net operating loss carryforwards
F-26 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
do not expire. The tax effect of the U.K. net operating loss carryforwards was $28.2 million at December 31, 2003, which the Company intends to utilize through future earnings. The Company's fully benefited U.S. foreign tax credit carryforwards will expire between 2004 and 2008.
Transocean Inc., a Cayman Islands company, is not subject to income taxes in the Cayman Islands. For the three years ended December 31, 2003, there was no Cayman Islands income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by a Cayman Islands company or its shareholders. The Company has obtained an assurance from the Cayman Islands government under the Tax Concessions Law (1995 Revision) that, in the event that any legislation is enacted in the Cayman Islands imposing tax computed on profits or income, or computed on any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, such tax shall not, until June 1, 2019, be applicable to the Company or to any of its operations or to the shares, debentures or other obligations of the Company. Therefore, under present law there will be no Cayman Islands tax consequences affecting distributions.
The Company's income tax returns are subject to review and examination in the various jurisdictions in which the Company operates. The U.S. Internal Revenue Service is currently auditing the years 1999 and 2000. In addition, other tax authorities have questioned the amounts of income and expense subject to tax in their jurisdiction for prior periods. The Company is currently contesting additional assessments which have been asserted and may contest any future assessments. While the Company cannot predict or provide assurance as to the final outcome of existing or future assessments, it believes the ultimate resolution of these asserted income tax liabilities will not have a material adverse effect on the Company's business, consolidated financial position or results of operations.
In connection with the distribution of Sedco Forex Holdings Limited (“Sedco Forex”) to the Schlumberger Limited (“Schlumberger”) shareholders in December 1999, Sedco Forex and Schlumberger entered into a Tax Separation Agreement. In accordance with the terms of the Tax Separation Agreement, Schlumberger agreed to indemnify Sedco Forex for any tax liabilities incurred directly in connection with the preparation of Sedco Forex for this distribution. In addition, Schlumberger agreed to indemnify Sedco Forex for tax liabilities associated with Sedco Forex operations conducted through Schlumberger entities prior to the merger and any tax liabilities associated with Sedco Forex assets retained by Schlumberger.
The Company was included in the consolidated federal income tax returns filed by a former parent, Sonat Inc. (“Sonat”) during all periods in which Sonat's ownership was greater than or equal to 80 percent (“Affiliation Years”). The Company and Sonat entered into a Tax Sharing Agreement providing for the manner of determining payments with respect to federal income tax liabilities and benefits arising in the Affiliation Years. Under the Tax Sharing Agreement, the Company will pay to Sonat an amount equal to the Company's share of the Sonat consolidated federal income tax liability, generally determined on a separate return basis. In addition, Sonat will pay the Company for Sonat's utilization of deductions, losses and credits that are attributable to the Company and in excess of that which would be utilized on a separate return basis.
Note 15—Commitments and Contingencies
Operating LeasesThe Company has operating lease commitments expiring at various dates, principally for real estate, office space, office equipment and rig bareboat charters. In addition to rental payments, some leases provide that the Company pay a pro rata share of operating costs applicable to the leased property. As of December 31, 2003, future minimum rental payments related to noncancellable operating leases are as follows (in millions):
Years ended December 31,
2004 ...... $27.0 2005 ...... 21.2 2006 ...... 7.7 2007 ...... 7.0 2008 ...... 7.2 Thereafter ...... 13.5 Total ...... $83.6
F-27 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company is a party to an operating lease on the M. G. Hulme, Jr. The drilling rig is leased from Deep Sea Investors, L.L.C., a special purpose entity formed by several leasing companies to acquire the rig from one of the Company's subsidiaries in November 1995 in a sale/leaseback transaction. Under this lease, the Company may purchase the rig for a maximum amount of approximately $35.7 million at the end of the lease term of November 29, 2005. At December 31, 2003, the future minimum lease payments, excluding the purchase option, was $24.9 million and was included in the table above.
Rental expense for all operating leases, including leases with terms of less than one year, was approximately $51 million, $52 million and $96 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Legal Proceedings—In 1990 and 1991, two of the Company's subsidiaries were served with various assessments collectively valued at approximately $5.8 million from the municipality of Rio de Janeiro, Brazil to collect a municipal tax on services. The Company believes that neither subsidiary is liable for the taxes and has contested the assessments in the Brazilian administrative and court systems. In October 2001, the Brazil Supreme Court rejected the Company's appeal of an adverse lower court's ruling with respect to a June 1991 assessment, which is valued at approximately $5 million. The Company is continuing to challenge the assessment and has an action to suspend a related tax foreclosure proceeding, which is currently at the trial court level. The Company received a favorable ruling in connection with a disputed August 1990 assessment but the government has appealed that ruling. The Company also received an adverse ruling from the Taxpayer's Council in connection with an October 1990 assessment and is appealing the ruling. If the Company's defenses are ultimately unsuccessful, the Company believes that the Brazilian government-controlled oil company, Petrobras, has a contractual obligation to reimburse the Company for municipal tax payments required to be paid by them. The Company does not expect the liability, if any, resulting from these assessments to have a material adverse effect on its business or consolidated financial position.
The Indian Customs Department, Mumbai, filed a “show cause notice” against a subsidiary of the Company and various third parties in July 1999. The show cause notice alleged that the initial entry into India in 1988 and other subsequent movements of the Trident II jackup rig operated by the subsidiary constituted imports and exports for which proper customs procedures were not followed and sought payment of customs duties of approximately $31 million based on an alleged 1998 rig value of $49 million, with interest and penalties, and confiscation of the rig. In January 2000, the Customs Department issued its order, which found that the Company had imported the rig improperly and intentionally concealed the import from the authorities, and directed the Company to pay a redemption fee of approximately $3 million for the rig in lieu of confiscation and to pay penalties of approximately $1 million in addition to the amount of customs duties owed. In February 2000, the Company filed an appeal with the Customs, Excise and Gold (Control) Appellate Tribunal (“CEGAT”) together with an application to have the confiscation of the rig stayed pending the outcome of the appeal. In March 2000, the CEGAT ruled on the stay application, directing that the confiscation be stayed pending the appeal. The CEGAT issued its opinion on the Company's appeal on February 2, 2001, and while it found that the rig was imported in 1988 without proper documentation or payment of duties, the redemption fee and penalties were reduced to less than $0.1 million in view of the ambiguity surrounding the import practice at the time and the lack of intentional concealment by the Company. The CEGAT further sustained the Company's position regarding the value of the rig at the time of import as $13 million and ruled that subsequent movements of the rig were not liable to import documentation or duties in view of the prevailing practice of the Customs Department, thus limiting the Company's exposure as to custom duties to approximately $6 million. Following the CEGAT order, the Company tendered payment of redemption, penalty and duty in the amount specified by the order by offset against a $0.6 million deposit and $10.7 million guarantee previously made by the Company. The Customs Department attempted to draw the entire guarantee, alleging the actual duty payable is approximately $22 million based on an interpretation of the CEGAT order that the Company believes is incorrect. This action was stopped by an interim ruling of the High Court, Mumbai on writ petition filed by the Company. Both the Customs Department and the Company filed appeals with the Supreme Court of India against the order of the CEGAT, and both appeals have been admitted. The Company is now awaiting a hearing date. The Company and its customer agreed to pursue and obtained the issuance of documentation from the Ministry of Petroleum that, if accepted by the Customs Department, would reduce the duty to nil. The agreement with the customer further provided that if this reduction was not obtained by the end of 2001, the customer would pay the duty up to a limit of $7.7 million. The Customs Department did not accept the documentation or agree to refund the duties already paid. The Company is pursuing its remedies against the Customs Department and the customer. The Company does not expect, in any event, that the ultimate liability, if any, resulting from the matter will have a material adverse effect on its business or consolidated financial position.
In March 1997, an action was filed by Mobil Exploration and Producing U.S. Inc. and affiliates, St. Mary Land & Exploration Company and affiliates and Samuel Geary and Associates, Inc. against TODCO, its underwriters and insurance broker in the 16th Judicial District Court of St. Mary Parish, Louisiana. The plaintiffs alleged damages amounting to in excess of $50 million in connection with the drilling of a turnkey well in 1995 and 1996. The case was tried before a jury in January and February 2000, and the jury returned a verdict of approximately $30 million in favor of the plaintiffs for excess drilling
F-28 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
costs, loss of insurance proceeds, loss of hydrocarbons and interest. The Company believes that most, if not all, of the settlement amounts are covered by relevant primary and excess liability insurance policies. However, the insurers and underwriters denied coverage and one has filed a counterclaim. TODCO has instituted litigation against those insurers and underwriters to enforce its rights under the relevant policies. TODCO has settled with some of the insurers but is continuing the litigation against the remaining insurers. The Company is responsible for any losses TODCO incurs from these actions under the master separation agreement with TODCO and the Company will benefit from any recovery. The Company does not expect that the ultimate outcome of this case will have a material adverse effect on its business or consolidated financial position.
In October 2001, TODCO was notified by the U.S. Environmental Protection Agency (“EPA”) that the EPA had identified a subsidiary of TODCO as a potentially responsible party in connection with the Palmer Barge Line superfund site located in Port Arthur, Jefferson County, Texas. Based upon the information provided by the EPA and the review of TODCO’s internal records to date, TODCO disputes its designation as a potentially responsible party. Pursuant to the master separation agreement with TODCO, the Company is responsible and will indemnify TODCO for any losses TODCO incurs in connection with this action. The Company does not expect that the ultimate outcome of this case will have a material adverse effect on the Company’s business or consolidated financial position.
In August 2003, a judgment of approximately $9.5 million was entered by the Labor Division of the Provincial Court of Luanda, Angola, against the Company and a labor contractor for the Company, Hull Blyth, in favor of certain former workers on several of the Company’s drilling rigs. The workers were employed by Hull Blyth to work on several drilling rigs while the rigs were located in Angola. When the drilling contracts concluded and the rigs left Angola, the workers’ employment ended. The workers brought suit claiming that they were not properly compensated when their employment ended. In addition to the monetary judgment, the Labor Division ordered the workers to be hired by the Company. The Company believes that this judgment is without sufficient legal foundation and has appealed the matter to the Angola Supreme Court. The Company further believes that Hull Blyth has an obligation to protect the Company from any judgment. The Company does not believe that the ultimate outcome of this matter will have a material adverse effect on the Company’s business or consolidated financial position.
The Company and its subsidiaries are involved in a number of other lawsuits, all of which have arisen in the ordinary course of the Company's business. The Company does not believe that ultimate liability, if any, resulting from any such other pending litigation will have a material adverse effect on its business or consolidated financial position.
Self Insurance—The Company is self-insured for the deductible portion of its insurance coverage. In the opinion of management, adequate accruals have been made based on known and estimated exposures up to the deductible portion of the Company's insurance coverages. Management believes that claims and liabilities in excess of the amounts accrued are adequately insured.
Letters of Credit and Surety Bonds—The Company had letters of credit outstanding at December 31, 2003 totaling $186.2 million. These letters of credit guarantee various contract bidding and insurance activities under various lines provided by several banks.
As is customary in the contract drilling business, the Company also has various surety bonds totaling $169.5 million in place that secure customs obligations relating to the importation of its rigs and certain performance and other obligations.
Note 16—Stock-Based Compensation Plans
Long-Term Incentive Plan—The Company has an incentive plan for key employees and outside directors (the “Incentive Plan”). Prior to 2003, the Company accounted for its Incentive Plan under APB 25 and related interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123 using the prospective method. Under the prospective method and in accordance with the provisions of SFAS 148 (see Note 2), the recognition provisions are applied to all employee awards granted, modified, or settled after January 1, 2003.
Under the Incentive Plan, awards can be granted in the form of stock options, nonvested restricted stock, stock appreciation rights (“SARs”) and cash performance awards. Such awards include traditional time-vesting awards (“time-based vesting awards”), and awards that are earned based on the achievement of certain performance criteria (“performance-based awards”). Options issued under the Incentive Plan have a 10-year term. Time-based vesting awards vest in three equal annual installments after the date of grant. Performance-based awards have a two year performance cycle with the number of options or shares earned being determined following the completion of the performance cycle (the “determination date”) at which time
F-29 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
one-third of the options or shares granted vest. Additional vesting occurs January 1 of the two subsequent years following the determination date.
As of December 31, 2003, the Company was authorized to grant up to (i) 18.9 million ordinary shares to employees; (ii) 600,000 ordinary shares to outside directors; and (iii) 300,000 freestanding SARs to employees or directors under the Incentive Plan. On December 31, 1999, all unvested stock options and SARs and all nonvested restricted shares granted after April 1996 became fully vested as a result of the Sedco Forex merger. At December 31, 2003, there were approximately 6.2 million total shares available for future grants under the Incentive Plan, assuming that the 1.5 million performance-based awards in 2003 are ultimately issued at the maximum amount.
Prior to the Sedco Forex merger, key employees of Sedco Forex were granted stock options at various dates under the Schlumberger stock option plans. For all of the stock options granted under such plans, the exercise price of each option equaled the market price of Schlumberger stock on the date of grant, each option's maximum term was 10 years and the options generally vested in 20 percent increments over five years. Fully vested Schlumberger options held by Sedco Forex employees at the date of the spin-off will lapse in accordance with their provisions. Non-vested Schlumberger options were terminated and fully vested stock options to purchase ordinary shares of the Company were granted under a new plan (the “SF Plan”).
Prior to the R&B Falcon merger (see Note 4), certain employees and outside directors of R&B Falcon and its subsidiaries were granted stock options under various plans. As a result of the R&B Falcon merger, the Company assumed all outstanding R&B Falcon stock options and converted them into options to purchase ordinary shares of the Company.
Time-Based Vesting Awards
The following table summarizes time-based vesting stock option activity:
Number of Shares Weighted-Average Under Option Exercise Price Outstanding at December 31, 2000 ...... 4,374,408 $30.74
Granted...... 2,370,840 38.53 Options assumed in the R&B Falcon merger ...... 8,094,010 22.25 Exercised ...... (1,286,554) 20.91 Forfeited ...... (92,025) 42.15 Outstanding at December 31, 2001 ...... 13,460,679 27.99
Granted...... 2,160,963 28.63 Exercised ...... (102,480) 18.12 Forfeited ...... (141,576) 37.99 Outstanding at December 31, 2002 ...... 15,377,586 28.03
Granted...... 314,860 20.95 Exercised ...... (149,361) 10.97 Forfeited ...... (267,684) 35.47 Outstanding at December 31, 2003 ...... 15,275,401 $27.92
Exercisable at December 31, 2001 ...... 9,977,963 $24.29 Exercisable at December 31, 2002 ...... 11,332,039 $26.14 Exercisable at December 31, 2003 ...... 13,091,737 $27.53
F-30 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table summarizes information about time-based vesting stock options outstanding at December 31, 2003:
Weighted-Average Options Outstanding Options Exercisable Range of Remaining Number Weighted-Average Number Weighted-Average Exercise Prices Contractual Life Outstanding Exercise Price Outstanding Exercise Price
$ 8.38 – $19.86 4.75 years 3,980,811 $15.16 3,876,143 $15.05 $20.12 – $33.69 5.99 years 6,212,583 $25.96 4,773,521 $25.54 $34.63 – $81.78 6.44 years 5,082,007 $40.30 4,442,073 $40.56
At December 31, 2003, there were 41,360 time-based vesting nonvested restricted ordinary shares and 135,418 SARs outstanding under the Incentive Plan.
Performance-Based Awards
There was no performance-based award activity prior to 2003. The following table summarizes performance-based stock option activity during 2003:
Number of Shares Weighted-Average Under Option Exercise Price
Granted ...... 725,350 $21.20 Forfeited...... (39,019) 21.20 Outstanding at December 31, 2003...... 686,331 $21.20
At December 31, 2003, none of the performance-based stock options were exercisable.
The following table summarizes information about performance-based stock options outstanding at December 31, 2003:
Weighted-Average Options Outstanding Options Exercisable Range of Remaining Number Weighted-Average Number Weighted-Average Exercise Prices Contractual Life Outstanding Exercise Price Outstanding Exercise Price
$21.20 9.52 years 686,331 $21.20 – $–
During 2003, the Company granted performance-based nonvested restricted ordinary share awards that are earnable based on the achievement of certain performance targets. The number of shares to be issued will be quantified upon completion of the performance period at the determination date. At December 31, 2003, the maximum number of nonvested restricted ordinary shares that could be issued at the determination date was 829,065.
Employee Stock Purchase Plan—The Company provides a stock purchase plan (the “Stock Purchase Plan”) for certain full-time employees. Under the terms of the Stock Purchase Plan, employees can choose each year to have between two and 20 percent of their annual base earnings withheld to purchase up to $25,000 of the Company's ordinary shares. The purchase price of the stock is 85 percent of the lower of its beginning-of-year or end-of-year market price. At December 31, 2003, 777,930 ordinary shares were available for issuance pursuant to the Stock Purchase Plan.
Note 17—Retirement Plans, Other Postemployment Benefits and Other Benefit Plans
Defined Benefit Pension Plans—The Company maintains a qualified defined benefit pension plan (the “Retirement Plan”) covering substantially all U.S. employees except for TODCO employees, and an unfunded plan (the “Supplemental Benefit Plan”) to provide certain eligible employees with benefits in excess of those allowed under the Retirement Plan. In conjunction with the R&B Falcon merger, the Company acquired two funded and one unfunded defined benefit pension plans (the “Frozen Plans”) that were frozen prior to the merger for which benefits no longer accrue, but the pension obligations have
F-31 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
not been fully paid out. The Company refers to the Retirement Plan, the Supplemental Benefit Plan and the Frozen Plans collectively as the U.S. Plans.
In addition, the Company provides several defined benefit plans, primarily group pension schemes with life insurance companies covering our Norway operations and two unfunded plans covering certain of the Company’s employees and former employees (the “Norway Plans”). Certain of the Norway plans are funded in part by employee contributions. Company contributions to the Norway Plans are determined primarily by the respective life insurance companies based on the terms of the plan. For the insurance-based plans, annual premium payments are considered to represent a reasonable approximation of the service costs of benefits earned during the period. The Company also has an unfunded defined benefit plan (the “Nigeria Plan”) that provides retirement and severance benefits for certain Nigerian employees. The defined benefit pension benefits provided by the Company are comprised of the U.S. Plans, the Norway Plans and the Nigeria Plan (collectively the “Transocean Plans”). The Company uses a January 1 measurement date for all of its plans.
The change in projected benefit obligation, change in plan assets and funded status is shown in the table below (in millions):
December 31, 2003 2002 Change in projected benefit obligation Projected benefit obligation at beginning of year...... $ 295.6 $ 242.7 Service cost ...... 16.6 16.8 Interest cost ...... 18.2 19.0 Actuarial losses (gains) ...... (7.6) 27.0 Settlements / curtailments ...... (7.5) – Special termination benefits...... – 1.1 Plan amendments ...... (6.4) 3.1 Benefits paid ...... (13.4) (14.1) Projected benefit obligation at end of year...... 295.5 295.6
Change in plan assets Fair value of plan assets at beginning of year ...... 188.5 210.4 Actual return on plan assets ...... 33.8 (14.4) Employer contributions...... 23.3 6.6 Settlements / curtailments ...... (17.8) – Benefits paid ...... (13.4) (14.1) Fair value of plan assets at end of year...... 214.4 188.5
Funded status (81.1) (107.1) Unrecognized transition obligation ...... 2.0 2.9 Unrecognized net actuarial loss...... 71.7 86.4 Unrecognized prior service cost...... 2.3 11.3 Accrued pension liability...... $ (5.1) $ (6.5)
Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost...... $ 3.4 $ 1.6 Accrued benefit liability...... (44.3) (54.5) Intangible asset...... 0.1 0.7 Accumulated other comprehensive income...... 35.7 45.7 Net amount recognized...... $ (5.1) $ (6.5)
The accumulated benefit obligation for all defined benefit pension plans was $241.5 million and $227.7 million at December 31, 2003 and 2002, respectively.
F-32 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The aggregate projected benefit obligation and fair value of plan assets for plans with a projected benefit obligation in excess of plan assets are as follows (in millions):
December 31, 2003 2002
Projected benefit obligation ...... $ 286.1 $ 291.3 Fair value of plan assets ...... 204.7 182.9
The aggregate accumulated benefit obligation and fair value of plan assets for plans with an accumulated benefit obligation in excess of plan assets are as follows (in millions):
December 31, 2003 2002
Accumulated benefit obligation ...... $ 228.5 $ 216.0 Fair value of plan assets ...... 195.2 174.3
Net periodic benefit cost included the following components (in millions):
Years ended December 31, 2003 2002 2001 Components of Net Periodic Benefit Cost (a) Service cost...... $ 16.6 $ 16.8 $ 12.0 Interest cost...... 18.2 19.0 15.9 Expected return on plan assets...... (19.7) (20.7) (7.5) Amortization of transition obligation...... 0.3 0.3 0.3 Amortization of prior service cost ...... 1.3 1.4 0.4 Recognized net actuarial (gains) losses ...... 0.4 (0.5) (11.3) Special termination benefits (b)...... – 1.1 – SFAS 88 settlements/curtailments ...... 4.7 (0.3) – Benefit cost...... $ 21.8 $ 17.1 $ 9.8
Increase (decrease) in minimum pension liability included in other comprehensive income (in millions)...... $(10.0) $ 45.7 $ − ______(a) Amounts are before income tax effect. (b) Special termination benefits paid to a former executive officer of the Company from the Company's unfunded supplemental pension plan upon the officer’s retirement in June 2002.
Weighted-average assumptions used to determine benefit obligations:
December 31, 2003 2002
Discount rate ...... 6.25% 6.90% Rate of compensation increase...... 5.24% 5.53%
Weighted-average assumptions used to determine net periodic benefit cost:
December 31, 2003 2002 2001
Discount rate ...... 6.65% 7.31% 7.75% Expected long-term rate of return in plan assets ...... 8.73% 8.73% 9.24% Rate of compensation increase...... 5.24% 5.53% 5.71%
F-33 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The defined benefit pension obligations and the related benefit costs are accounted for in accordance with SFAS 87, Employers’ Accounting for Pensions. Pension obligations are actuarially determined and are affected by assumptions including expected return on plan assets, discount rates, compensation increases, and employee turnover rates. The Company evaluates its assumptions periodically and makes adjustments to these assumptions and the recorded liabilities as necessary.
Two of the most critical assumptions are the expected long-term rate of return on plan assets and the assumed discount rate. The Company evaluates assumptions regarding the estimated long-term rate of return on plan assets based on historical experience and future expectations on investment returns, which are calculated by a third party investment advisor utilizing the asset allocation classes held by the plan’s portfolios. The Company utilizes the Moody’s Aa long-term corporate bond yield as a basis for determining the discount rate for a majority of its plans. Changes in these and other assumptions used in the actuarial computations could impact the plans projected benefit obligations, pension liabilities, pension expense and other comprehensive income. The determination of pension expense is based on a market-related valuation of assets that reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets.
The Company’s pension plan weighted-average asset allocations for funded Transocean Plans by asset category are as follows:
December 31, 2003 2002
Equity securities...... 59.7% 53.0% Debt securities...... 30.1% 36.2% Other ...... 10.2% 10.8% Total...... 100.0% 100.0%
The Company has determined the asset allocation of the plans that it believes is best able to produce maximum long- term gains without taking on undue risk. After modeling many different asset allocation scenarios, the Company has determined that an asset allocation mix of approximately 60 percent equity securities, 30 percent debt securities, and 10 percent other investments is most appropriate. Other investments are generally a diversified mix of funds that specialize in various equity and debt strategies that are expected to provide positive returns each year relative to U.S. Treasury Bills. These strategies may include, among others, arbitrage, short-selling, and merger and acquisition investment opportunities. The Company reviews asset allocations and results quarterly to ensure that managers are meeting specified objectives and policies as written and agreed to by each manager and the Company. These objectives and policies are reviewed each year.
The plan’s investment managers have discretion in the securities in which they may invest within their asset category. Given this discretion, the managers may, from time-to-time, invest in the Company’s stock or debt. This could include taking either long or short positions in such securities. As these managers are required to maintain well diversified portfolios, the actual investment in the Company’s common stock would be immaterial relative to asset categories and the overall plan.
The Company expects to contribute $10.0 million to the Transocean Plans in 2004, comprised of $5.4 million to the funded U.S. Plans, an estimated $2.0 million to fund expected benefit payments for the unfunded U.S. Plans and Nigeria Plan, and an estimated $2.6 million for the Norway Plans to fund expected benefit payments.
Nigeria Plan—During 2003, the Company terminated all Nigerian employees, which resulted in the payment of all accrued benefits under the Nigeria Plan. Approximately 80 of these employees were made redundant during 2003, while the remaining employees not considered redundant were rehired under a new plan. In accordance with the provisions of SFAS 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits, this resulted in a partial plan curtailment and a plan settlement. The Company paid approximately $17.0 million in severance benefits under the Nigeria Plan during 2003 as a result of these events. In accordance with SFAS 88, the Company has accounted for these events as a plan restructuring and recorded a net settlement expense of $10.4 million, as well as a $4.6 million liability. This liability will reduce future pension expense related to the Nigeria Plan as it will be recognized over the expected service term of the related employees. Pension expense for the Nigeria Plan is estimated to be $0.1 million in 2004 and represents a 94.6% decrease as compared to the 2003 plan expenses (excluding the settlement related expenses discussed above).
F-34 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Postretirement Benefits Other Than Pensions—The Company has several unfunded contributory and noncontributory postretirement benefit plans covering substantially all of its Transocean Drilling segment U.S. employees. The postretirement health care plans include a limit on the Company’s share of costs for recent and future retirees. The Company uses a January 1 measurement date for all of its plans.
The change in benefit obligation, change in plan assets and funded status are shown in the table below (in millions):
December 31, 2003 2002 Change in benefit obligation Benefit obligation at beginning of year ...... $ 41.2 $ 29.2 Service cost...... 1.9 1.0 Interest cost...... 3.4 2.5 Actuarial losses...... 20.1 6.7 Participants’ contributions ...... 0.3 0.2 Plan amendments...... – 3.5 Settlements / curtailments...... (2.9)– Benefits paid...... (2.0) (1.9) Benefit obligation at end of year ...... 62.0 41.2
Change in plan assets Fair value of plan assets at beginning of year...... 0.2 0.5 Actual return on plan assets...... (0.2) (0.3) Company contributions...... 1.7 1.7 Participants’ contributions ...... 0.3 0.2 Benefits paid...... (2.0) (1.9) Fair value of plan assets at end of year ...... – 0.2
Funded status ...... (62.0) (41.0) Unrecognized net actuarial gain ...... 26.0 7.6 Unrecognized prior service cost ...... 1.2 3.3 Postretirement benefit liability ...... $(34.8) $(30.1)
Amounts recognized in the consolidated balance sheets for the years ended December 31, 2003 and 2002 consisted of accrued benefit costs totaling $34.8 million and $30.1 million, respectively. There were no prepaid benefit costs recognized for the years ended December 31, 2003 and 2002.
Net periodic benefit cost included the following components (in millions):
Years ended December 31, 2003 2002 2001 Components of Net Periodic Benefit Cost Service cost ...... $ 2.0 $1.0 $ 0.4 Interest cost ...... 3.4 2.5 1.9 Amortization of prior service cost...... 0.3 0.5 – Settlements/curtailments ...... (0.6) – – Recognized net actuarial loss (gain)...... 1.3 0.3 (0.1) Benefit Cost...... $ 6.4 $4.3 $ 2.2
One of the Company’s postretirement benefit plans is a retiree life insurance plan. Effective January 1, 2003, the plan was amended such that participants who retire after December 31, 2002 no longer receive postretirement benefits provided under this plan. As such, the Company recorded a curtailment gain of $0.6 million related to this amendment.
F-35 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Weighted-average discount rates used to determine benefit obligations were 6.00% and 6.50% for the years ended December 31, 2003 and 2002, respectively. Weighted-average assumptions used to determine net periodic benefit cost were as follows:
December 31, 2003 2002 2001
Discount rate...... 6.50% 6.50% 7.00% Expected long-term rate of return in plan assets...... – – 7.00% Rate of compensation increase ...... 5.50% 5.50% 5.50%
Assumed health care cost trend rates were as follows:
December 31, 2003 2002
Health care cost trend rate assumed for next year...... 11% 12% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) ...... 5% 5% Year that the rate reaches the ultimate trend rate ...... 2009 2009
The assumed health care cost trend rate has significant impact on the amounts reported for postretirement benefits other than pensions. A one-percentage point change in the assumed health care trend rate would have the following effects (in millions): One- One- Percentage Percentage Point Point Increase Decrease Effect on total service and interest cost components in 2003...... $ 0.8 $ (0.6) Effect on postretirement benefit obligations as of December 31, 2003...... $ 7.3 $ (5.8)
The Company’s other postretirement benefit (retiree life insurance and medical benefits) obligations and the related benefit costs are accounted for in accordance with SFAS 106, Employers’ Accounting for Postretirement Benefits Other than Pensions. Postretirement costs and obligations are actuarially determined and are affected by assumptions including expected discount rates, compensation increases, employee turnover rates and health care cost trend rates. The Company evaluates its assumptions periodically and makes adjustments to these assumptions and the recorded liabilities as necessary.
Two of the most critical assumptions for postretirement benefit plans are the assumed discount rate and the expected health care cost trend rates. The Company utilizes the Moody’s Aa long-term corporate bond yield as a basis for determining the discount rate. The accumulated postretirement benefit obligation and service cost were developed using a health care trend rate of 11.0 percent for 2003 reducing 1.0 percent per year to an ultimate trend rate of 5.0 percent per year for 2009 and later. The initial trend rate was selected with reference to recent Transocean experience and broader national statistics. The ultimate trend rate is a long term assumption and was selected to reflect the anticipation that the portion of gross domestic product devoted to health care becomes constant. Changes in these and other assumptions used in the actuarial computations could impact the Company’s projected benefit obligations, pension liabilities and pension expense.
The Company expects to contribute $1.8 million to its other postretirement benefit plans in 2004 to fund expected benefit payments.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduced a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that currently provide a prescription drug benefit that is equivalent to the expanded Medicare benefit. Employers have the option to either receive the subsidy or to supplement the Medicare paid prescription drug benefit on a secondary payor basis. In accordance with SFAS 106, employers are required to consider presently enacted changes in relevant laws in current period measurements of postretirement benefit costs and the accumulated postretirement benefit obligation. As a result, the accumulated postretirement benefit obligation and net periodic postretirement benefit costs for future periods should reflect the effects of the Act.
F-36 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In January 2004, the FASB staff issued FASB Staff Position (“FSP”) 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The deferral will continue to apply until authoritative guidance on the accounting for the federal subsidy is issued or a significant event occurs that would ordinarily call for remeasurement of a plan’s assets and obligations. The Company elected to defer accounting for the Act and will continue to assess the effects the Act will have on its postretirement benefit plan costs. As a result of the deferral election, the disclosures above relating to the net periodic postretirement benefit costs do not reflect the effects of the Act on the Company’s postretirement benefit plans. The finalization of pending authoritative guidance could require restatement of previously reported information.
Defined Contribution Plans—The Company provides a defined contribution pension and savings plan covering senior non-U.S. field employees working outside the United States. Contributions and costs are determined as 4.5 percent to 6.5 percent of each covered employee's salary, based on years of service. In addition, the Company sponsors a U.S. defined contribution savings plan that covers certain employees and limits Company contributions to no more than 4.5 percent of each covered employee's salary, based on the employee's contribution. The Company also sponsors various other defined contribution plans worldwide. The Company recorded approximately $21.8 million, $21.3 million and $21.6 million of expense related to its defined contribution plans for the years ended December 31, 2003, 2002 and 2001, respectively.
Deferred Compensation Plan—The Company provides a Deferred Compensation Plan (the “Plan”). The Plan's primary purpose is to provide tax-advantageous asset accumulation for a select group of management, highly compensated employees and non-employee members of the Board of Directors of the Company.
Eligible employees who enroll in the Plan may elect to defer up to a maximum of 90 percent of base salary, 100 percent of any future performance awards, 100 percent of any special payments and 100 percent of directors' meeting fees and annual retainers; however, the Administrative Committee (seven individuals appointed by the Finance and Benefits Committee of the Board of Directors) may, at its discretion, establish minimum amounts that must be deferred by anyone electing to participate in the Plan. In addition, the Executive Compensation Committee of the Board of Directors may authorize employer contributions to participants and the Chief Executive Officer of the Company, with Executive Compensation Committee approval, is authorized to cause the Company to enter into “Deferred Compensation Award Agreements” with such participants. There were no employer contributions to the Plan during the years ending December 31, 2003, 2002 or 2001.
Note 18—Investments in and Advances to Joint Ventures
The Company had a 25 percent interest in Sea Wolf. In September 1997, Sedco Forex sold two semisubmersible rigs, the Drill Star and Sedco Explorer, to Sea Wolf. The Company operated the rigs under bareboat charters. The sale resulted in a deferred gain of approximately $157 million, which was being amortized to operating and maintenance expense over the six- year life of the bareboat charters. See Note 6. As of December 31, 2001, Sea Wolf distributed substantially all of its assets to its shareholders and was dissolved in 2003.
The Company has a 50 percent interest in Overseas Drilling Limited (“ODL”), which owns the drillship, Joides Resolution. The drillship is contracted to perform drilling and coring operations in deep waters worldwide for the purpose of scientific research. The Company manages and operates the vessel on behalf of ODL. See Note 20.
At December 31, 2000, the Company had a 24.9 percent interest in Arcade, a Norwegian offshore drilling company. Arcade owns two high-specification semisubmersible rigs, the Henry Goodrich and Paul B. Loyd, Jr. Because TODCO owned 74.4 percent of Arcade, Arcade was consolidated in the Company's financial statements effective with the R&B Falcon merger. In October 2001, the Company purchased the remaining minority interest in Arcade. The purchase price of $3.2 million was finalized in January 2003.
As a result of the R&B Falcon merger, the Company had ownership interests in two unconsolidated joint ventures, 50 percent in DD LLC and 60 percent in DDII LLC. Subsidiaries of ConocoPhillips owned the remaining interests in these joint ventures. The Company purchased ConocoPhillips’ interests in DDII LLC and DD LLC in late May 2003 and late December 2003, respectively, at which time both DDII LLC and DD LLC became wholly owned subsidiaries. See Note 5.
F-37 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As a result of the R&B Falcon merger, TODCO has a 25 percent ownership interest in Delta Towing. See Note 20. As result of the Company’s adoption of FIN 46 effective December 31, 2003, Delta Towing was consolidated at December 31, 2003. See Note 2.
Note 19—Segments, Geographical Analysis and Major Customers
The Company’s operations are aggregated into two reportable segments: (i) Transocean Drilling and (ii) TODCO. The Transocean Drilling segment consists of floaters, jackups and other rigs used in support of offshore drilling activities and offshore support services. The TODCO segment consists of our interest in TODCO, which conducts jackups, barge drilling rigs, land rigs, submersibles and other rig operations located in the U.S. Gulf of Mexico and inland waters, Mexico, Trinidad and Venezuela. The Company provides services with different types of drilling equipment in several geographic regions. The location of the Company’s rigs and the allocation of resources to build or upgrade rigs is determined by the activities and needs of customers. Accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2). The Company accounts for intersegment revenue and expenses as if the revenue or expenses were to third parties at current market prices.
Operating revenues and income (loss) before income taxes, minority interest and cumulative effect of changes in accounting principles by segment were as follows (in millions):
Years ended December 31, 2003 2002 2001 Operating Revenues Transocean Drilling ...... $2,206.7 $2,486.1 $2,385.2 TODCO ...... 227.6 187.8 441.1 Elimination of intersegment revenues ...... – – (6.2) Total Operating Revenues...... $2,434.3 $2,673.9 $2,820.1
Operating Income (Loss) Before General and Administrative Expense Transocean Drilling ...... $ 422.5 $(1,739.0) $582.1 TODCO ...... (117.5) (505.3) 25.8 305.0 (2,244.3) 607.9 Unallocated general and administrative expense...... (65.3) (65.6) (57.9) Unallocated other expense, net ...... (218.1) (178.9) (218.3) Income (Loss) Before Income Taxes, Minority Interest and Cumulative Effect of Changes in Accounting Principles...... $ 21.6 $(2,488.8) $331.7
Depreciation expense by segment was as follows (in millions):
Years ended December 31, 2003 2002 2001 Transocean Drilling ...... $416.0 $408.4 $373.5 TODCO ...... 92.2 91.9 96.6 Total Depreciation Expense ...... $508.2 $500.3 $470.1
F-38 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Total assets by segment were as follows (in millions):
December 31, 2003 2002
Transocean Drilling ...... $10,874.0 $11,804.1 TODCO ...... 788.6 861.0 Total Assets ...... $11,662.6 $12,665.1
Operating revenues and long-lived assets by country were as follows (in millions):
Years ended December 31, 2003 2002 2001 Operating Revenues United States...... $ 752.8 $ 752.5 $ 979.5 Brazil ...... 316.7 283.0 355.8 United Kingdom...... 211.6 345.7 354.6 Rest of the World (a) ...... 1,153.2 1,292.7 1,130.2 Total Operating Revenues ...... $2,434.3 $2,673.9 $2,820.1
As of December 31, 2003 2002 Long-Lived Assets United States...... $ 3,319.7 $ 3,905.0 Goodwill (b) ...... 2,230.8 2,218.2 Brazil ...... 1,282.9 1,239.5 Rest of the World (a) ...... 3,650.3 3,390.7 Total Long-Lived Assets ...... $10,483.7 $10,753.4 ______(a) Rest of the World represents countries in which the Company operates that individually had operating revenues or long- lived assets representing less than 10 percent of total operating revenues earned or total long-lived assets. (b) Goodwill has not been allocated to individual countries.
A substantial portion of the Company's assets are mobile. Asset locations at the end of the period are not necessarily indicative of the geographic distribution of the earnings generated by such assets during the periods.
The Company's international operations are subject to certain political and other uncertainties, including risks of war and civil disturbances (or other events that disrupt markets), expropriation of equipment, repatriation of income or capital, taxation policies, and the general hazards associated with certain areas in which operations are conducted.
For the year ended December 31, 2003, Petrobras, BP and Shell accounted for approximately 11.8 percent, 11.1 percent and 10.7 percent, respectively, of the Company's operating revenues, of which the majority was reported in the Transocean Drilling segment. For the year ended December 31, 2002, BP and Shell accounted for approximately 14.1 percent and 11.6 percent, respectively, of the Company's operating revenues, of which the majority was reported in the Transocean Drilling segment. For the year ended December 31, 2001, BP and Petrobras accounted for approximately 12.3 percent and 10.9 percent, respectively, of the Company's operating revenues, of which the majority was reported in the Transocean Drilling segment. The loss of these or other significant customers could have a material adverse effect on the Company's results of operations.
Note 20—Related Party Transactions
DD LLC and DDII LLC—Prior to the Company’s purchase of ConocoPhillips’ interest in DD LLC and DDII LLC (see Note 5), the Company was party to drilling services agreements with DD LLC and DDII LLC for the operations of the Deepwater Pathfinder and Deepwater Frontier, respectively. For the year ended December 31, 2003, the Company earned $1.6
F-39 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
million and $1.3 million for such services to DD LLC and DDII LLC, respectively. For the years ended December 31, 2002 and 2001, the Company earned $1.6 million and $1.4 million, respectively, for such services to each of DD LLC and DDII LLC. Such revenue amounts were included in operating revenues in the consolidated statement of operations. At December 31, 2002, the Company had receivables from DD LLC and DDII LLC of $2.6 million and $3.9 million, respectively, which were included in accounts receivable – other.
From time to time, the Company contracted the Deepwater Frontier from DDII LLC. During that time, DDII LLC billed the Company for the full operating dayrate and issued a non-cash credit for downtime hours in excess of 24 hours in any calendar month. The Company recorded a dayrate rebate receivable for all such non-cash credits and was responsible for payment of 100 percent of all drilling contract invoices received. At December 31, 2002, the cumulative dayrate rebate receivable from DDII LLC totaled $15.1 million and was recorded as investment in and advances to joint ventures in the consolidated balance sheet. For the year ended December 31, 2001, the Company incurred $54.4 million net expense from DDII LLC under the drilling contract. This amount was included in operating and maintenance expense in the Company’s consolidated statement of operations. The Company incurred no expense for the years ended December 31, 2003 or 2002 due to the expiration of its lease late in 2001. At December 31, 2002, the Company had amounts payable to DDII LLC of $0.3 million, which was included in accounts payable in the consolidated balance sheet.
Delta Towing—Immediately prior to the closing of the R&B Falcon merger, TODCO formed a joint venture to own and operate its U.S. inland marine support vessel business (the “Marine Business”). In connection with the formation of the joint venture, the Marine Business was transferred by a subsidiary of TODCO to Delta Towing in exchange for a 25 percent equity interest, and certain secured notes payable from Delta Towing. The secured notes consisted of (i) an $80.0 million principal amount note bearing interest at eight percent per annum due January 30, 2024 (the “Tier 1 Note”), (ii) a contingent $20.0 million principal amount note bearing interest at eight percent per annum with an expiration date of January 30, 2011 (the “Tier 2 Note”) and (iii) a contingent $44.0 million principal amount note bearing interest at eight percent per annum with an expiration date of January 30, 2011 (the “Tier 3 Note”). The 75 percent equity interest holder in the joint venture also loaned Delta Towing $3.0 million in the form of a Tier 1 Note. Until January 2011, Delta Towing must use 100 percent of its excess cash flow towards the payment of principal and interest on the Tier 1 Notes. After January 2011, 50 percent of its excess cash flows are to be applied towards the payment of principal and unpaid interest on the Tier 1 Notes. Interest is due and payable quarterly without regard to excess cash flow.
Delta Towing must repay at least (i) $8.3 million of the aggregate principal amount of the Tier 1 Note no later than January 2004, (ii) $24.9 million of the aggregate principal amount no later than January 2006 and (iii) $62.3 million of the aggregate principal amount no later than January 2008. After the Tier 1 Note has been repaid, Delta Towing must apply 75 percent of its excess cash flow towards payment of the Tier 2 Note. Upon the repayment of the Tier 2 Note, Delta Towing must apply 50 percent of its excess cash to repay principal and interest on the Tier 3 Note. Any amounts not yet due under the Tier 2 and Tier 3 Notes at the time of their expiration will be waived. The Tier 1, 2 and 3 Notes are secured by mortgages and liens on the vessels and other assets of Delta Towing.
TODCO valued its Tier 1, 2 and 3 Notes at $80 million immediately prior to the closing of the R&B Falcon merger, the effect of which was to fully reserve the Tier 2 and 3 Notes. At December 31, 2002, $78.9 million was outstanding under the Company's Tier 1 Note. For the years ended December 31, 2003, 2002 and 2001, the Company earned interest income on the outstanding balance at each period of $3.1 million, $6.3 million and $5.8 million, respectively, on the Tier 1 Note. In December 2001, the note agreement was amended to provide for a $4.0 million, three-year revolving credit facility (the “Delta Towing Revolver”) from the Company. Amounts drawn under the Delta Towing Revolver accrued interest at eight percent per annum, with interest payable quarterly. For each of the years ended December 31, 2003 and 2002, TODCO recognized $0.3 million of interest income on the Delta Towing Revolver. At December 31, 2002, $3.9 million was outstanding under the Delta Towing Revolver. At December 31, 2002, the Company had interest receivable from Delta Towing of $1.7 million.
Delta Towing defaulted on the notes in January 2003 by failing to make its scheduled quarterly interest payment and remains in default as a result of its continued failure to make its quarterly interest payments. As a result of TODCO’s continued evaluation of the collectibility of the notes, TODCO recorded a $21.3 million impairment of the notes in June 2003 based on Delta Towing’s discounted cash flows over the terms of the notes, which deteriorated in the second quarter of 2003 as a result of the continued decline in Delta Towing’s business outlook. As permitted in the notes in the event of default, TODCO began offsetting a portion of the amount owed to Delta Towing against the interest due under the notes. Additionally, in 2003, TODCO established a reserve of $1.6 million for interest income earned during the year ended December 31, 2003 on the notes receivable.
F-40 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As a result of the adoption of FIN 46 and a determination that TODCO was the primary beneficiary for accounting purposes of Delta Towing, TODCO consolidated Delta Towing effective December 31, 2003 and intercompany transactions and accounts have been eliminated. Consolidation of Delta Towing resulted in an increase in net assets and a corresponding gain as a cumulative effect of a change in accounting principle of approximately $0.8 million. See Note 2.
As part of the formation of the joint venture on January 31, 2001, TODCO entered into an agreement with Delta Towing under which TODCO committed to charter certain vessels for a period of one year ending January 31, 2002 and committed to charter for a period of 2.5 years from the date of delivery 10 crewboats then under construction, all of which had been placed into service as of December 31, 2002. During the year ended December 31, 2003, TODCO incurred charges of $11.7 million, which was reflected in operating and maintenance expense. During the year ended December 31, 2002, TODCO incurred charges totaling $10.7 million from Delta Towing for services rendered, of which $1.6 million was rebilled to TODCO’s customers and $9.1 million was reflected in operating and maintenance expense. During the year ended December 31, 2001, TODCO incurred charges totaling $15.6 million from Delta Towing for services rendered, of which $6.5 million was rebilled to TODCO’s customers and $9.1 million was reflected in operating and maintenance.
ODL—In conjunction with the management and operation of the Joides Resolution on behalf of ODL, the Company earned $1.2 million for the each of the years ended December 31, 2003, 2002 and 2001. Such amounts are included in operating revenues in the Company's consolidated statements of operations. At December 31, 2003 and 2002, the Company had receivables from ODL of $3.1 million and $1.2 million, respectively, which were recorded as accounts receivable – other in the consolidated balance sheets.
Note 21—Restructuring Charges
In September 2002, the Company committed to restructuring plans in France, Norway and in its TODCO segment. The Company established a liability of approximately $5.2 million for the estimated severance-related costs associated with the involuntary termination of 81 employees pursuant to these plans. The charge was reported as operating and maintenance expense in the Company’s consolidated statements of operations of which approximately $4.0 million and $1.2 million related to the Transocean Drilling segment and TODCO segment, respectively. Through December 31, 2003, approximately $4.6 million had been paid to 74 employees representing full or partial payments. In June 2003, the Company released the expected surplus liability of $0.3 million to operating and maintenance expense in the Transocean Drilling segment. Substantially all of the remaining liability is expected to be paid by the end of the first quarter in 2005.
F-41 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 22—Earnings Per Share
The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings (loss) per share is as follows (in millions, except per share data):
Years ended December 31, 2003 2002 2001 Numerator for Basic and Diluted Earnings (Loss) per Share Income (Loss) Before Cumulative Effect of Changes in Accounting Principles...... $ 18.4 $(2,368.2) $252.6 Cumulative Effect of Changes in Accounting Principles ...... 0.8 (1,363.7) − Net Income (Loss)...... $ 19.2 $(3,731.9) $252.6 Denominator for Diluted Earnings (Loss) per Share Weighted-average shares outstanding for basic earnings per share ...... 319.8 319.1 309.2 Effect of dilutive securities: Employee stock options and unvested stock grants ...... 1.1 – 3.4 Warrants to purchase ordinary shares ...... 0.5 – 2.2 Adjusted weighted-average shares and assumed conversions for diluted earnings (loss) per share ...... 321.4 319.1 314.8
Basic Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of Changes in Accounting Principles...... $ 0.06 $ (7.42) $ 0.82 Cumulative Effect of Changes in Accounting Principles ...... – (4.27) – Net Income (Loss)...... $ 0.06 $ (11.69) $ 0.82
Diluted Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of Changes in Accounting Principles...... $ 0.06 $ (7.42) $ 0.80 Cumulative Effect of Changes in Accounting Principles ...... – (4.27) – Net Income (Loss)...... $ 0.06 $ (11.69) $ 0.80
Ordinary shares subject to issuance pursuant to the conversion features of the convertible debentures (see Note 8) are not included in the calculation of adjusted weighted-average shares and assumed conversions for diluted earnings per share because the effect of including those shares is anti-dilutive for all periods presented. Incremental shares related to stock options, restricted stock grants and warrants are not included in the calculation of adjusted weighted-average shares and assumed conversions for diluted earnings per share because the effect of including those shares is anti-dilutive for the year ended December 31, 2002.
Note 23—Stock Warrants
In connection with the R&B Falcon merger, the Company assumed the then outstanding R&B Falcon stock warrants. Each warrant enables the holder to purchase 17.5 ordinary shares of the Company at an exercise price of $19.00 per share. The warrants expire on May 1, 2009. In 2001, the Company received $10.6 million and issued 560,000 ordinary shares as a result of 32,000 warrants being exercised. At December 31, 2003 there were 261,000 warrants outstanding to purchase 4,567,500 ordinary shares.
F-42 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 24—Quarterly Results (Unaudited)
Shown below are selected unaudited quarterly data (in millions, except per share data):
Quarter First Second Third Fourth 2003 Operating Revenues ...... $ 616.0 $603.9 $ 622.9 $ 591.5 Operating Income (a)...... 101.6 19.8 72.8 45.5 Income (Loss) Before Cumulative Effect of a Change in Accounting Principle ...... 47.2 (44.5) 11.0 4.7 Net Income (Loss) (b) ...... $ 47.2 $ (44.5) $ 11.0 $ 5.5 Basic Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of a Change in Accounting Principle ...... $ 0.15 $ (0.14) $ 0.03 $ 0.02 Diluted Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of a Change in Accounting Principle ...... $ 0.15 $ (0.14) $ 0.03 $ 0.02 Weighted Average Shares Outstanding Shares for basic earnings per share ...... 319.7 319.8 319.9 319.9 Shares for diluted earnings per share ...... 321.6 319.8 321.1 321.3
2002 Operating Revenues ...... $ 667.9 $646.2 $ 695.2 $ 664.6 Operating Income (Loss) (c)...... 142.3 139.0 136.1 (2,727.3) Income (Loss) Before Cumulative Effect of a Change in Accounting Principle ...... 77.3 80.0 255.2 (2,780.7) Net Income (Loss) (d) ...... $(1,286.4) $ 80.0 $ 255.2 $(2,780.7) Basic Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of a Change in Accounting Principle ...... $ 0.24 $ 0.25 $ 0.80 $ (8.71) Diluted Earnings (Loss) Per Share Income (Loss) Before Cumulative Effect of a Change in Accounting Principle ...... $ 0.24 $ 0.25 $ 0.79 $ (8.71) Weighted Average Shares Outstanding Shares for basic earnings per share ...... 319.1 319.1 319.2 319.2 Shares for diluted earnings per share ...... 323.1 323.9 328.8 319.2
______(a) Second quarter 2003 included loss on impairments of $15.8 million (see Note 7). Third Quarter 2003 included costs related to the TODCO IPO of $8.0 million (see Note 1). Fourth quarter 2003 included costs to restructure the Nigeria defined benefit plans of $16.9 million (see Note 17). (b) Second quarter 2003 included loss on retirement of debt of $13.8 million (see Note 8), impairment loss on note receivable from related party of $13.8 million (see Note 2) and a favorable resolution of a non-U.S. income tax liability of $14.6 million (see Note 14). (c) Third quarter 2002 included loss on impairments of $40.9 million. Fourth quarter 2002 included loss on impairments of $2,885.4 million. See Note 7. (d) First quarter 2002 included a cumulative effect of a change in accounting principle of $1,363.7 million relating to the impairment of goodwill (see Note 2). Third quarter 2002 included a foreign tax benefit of $176.2 million (see Note 14).
F-43 TRANSOCEAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 25—Subsequent Events (Unaudited)
IPO—In February 2004, the Company completed the IPO of TODCO, in which the Company sold 13.8 million shares of TODCO’s class A common stock, representing approximately 23 percent of TODCO’s total outstanding shares, at $12.00 per share. The Company received net proceeds of $155.7 million from the IPO and expects to recognize a gain of approximately $43 million in the first quarter of 2004, which represents the excess of net proceeds received over the net book value of the shares of TODCO sold in the IPO. The Company holds an approximate 77 percent interest in TODCO, represented by 46.2 million shares of class B common stock, and consolidates TODCO in its financial statements as a business segment.
The Company and TODCO entered into various agreements to set forth their respective rights and obligations relating to their businesses and effect the separation of the two companies. These agreements included a master separation agreement, tax sharing agreement, employee matters agreement, transition services agreement and registration rights agreement.
As a result of the deconsolidation of TODCO from the Company’s other U.S. subsidiaries for U.S. federal income tax purposes in conjunction with the IPO, the Company expects to establish a valuation allowance against the deferred tax assets of TODCO in excess of its deferred tax liabilities. The amount of such valuation allowance will depend upon many factors, including the ultimate allocation of tax benefits between TODCO and other subsidiaries of the Company under applicable law and taxable income for calendar year 2004. The amount of the valuation allowance could be as much as or more than the gain on the sale of the TODCO shares in the IPO discussed above.
In conjunction with the closing of the TODCO IPO, TODCO granted nonvested restricted stock and stock options to certain of its employees under its long-term incentive plan and certain of these awards vested at the time of grant. In accordance with the provisions of SFAS 123, TODCO expects to recognize as compensation expense approximately $17.0 million over the vesting periods of the awards. The Company expects TODCO will recognize approximately $6.0 million in the first quarter of 2004 as a result of the immediate vesting of certain awards. The Company also expects TODCO will amortize the remaining amount of approximately $11.0 million to compensation expense over the next three years with approximately $5.0 million over the remainder of 2004 and approximately $5.0 million and $1.0 million in 2005 and 2006, respectively. In addition, certain of TODCO’s employees held options to acquire the Company’s ordinary shares that were granted prior to the IPO. In accordance with the employee matters agreement, these options were modified, which resulted in the accelerated vesting of the options and the extension of the term of the options through the original contractual life. In connection with the modification of these options, TODCO will recognize approximately $1.5 million additional compensation in the first quarter of 2004.
9.5% Senior Note Redemption—In February 2004, the Company announced the redemption of the 9.5% Senior Notes due December 2008 at the make-whole premium price provided in the indenture. The redemption is expected to be completed by March 30, 2004. The face value of the bonds to be redeemed is $289.8 million. Based on interest rates at March 1, 2004, the cost to redeem these bonds is expected to be approximately $366.3 million, and the Company expects to recognize a loss on retirement of debt of approximately $24.1 million, which reflects adjustments for fair value of the debt at the R&B Falcon merger and the premium on the termination of the related interest rate swap. These amounts could vary depending upon actual interest rates. The Company expects to utilize existing cash balances, which includes proceeds from the TODCO IPO, to fund this redemption. The redemption does not affect the 9.5% Senior Notes due December 2008 of TODCO.
F-44 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company has not had a change in or disagreement with its accountants within 24 months prior to the date of its most recent financial statements or in any period subsequent to such date.
ITEM 9A. Controls and Procedures In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2003 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. PART III
ITEM 10. Directors and Executive Officers of the Registrant ITEM 11. Executive Compensation ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ITEM 13. Certain Relationships and Related Transactions ITEM 14. Principal Accounting Fees and Services The information required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference to the Company's definitive proxy statement for its 2004 annual general meeting of shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days of December 31, 2003. Certain information with respect to the executive officers of the Company is set forth in Item 4 of this annual report under the caption “Executive Officers of the Registrant.”
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Index to Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements Page Included in Part II of this report: Report of Independent Auditors ...... 52 Consolidated Statements of Operations...... 53 Consolidated Statements of Comprehensive Income (Loss) ...... 54 Consolidated Balance Sheets...... 55 Consolidated Statements of Equity...... 56 Consolidated Statements of Cash Flows...... 57 Notes to Consolidated Financial Statements ...... 59
Financial statements of unconsolidated joint ventures are not presented herein because such joint ventures do not meet the significance test.
(2) Financial Statement Schedules
F-45 Transocean Inc. and Subsidiaries Schedule II - Valuation and Qualifying Accounts (In millions)
Additions Charged Charged Balance at to Costs to Other Balance at Beginning and Accounts Deductions End of of Period Expenses Describe Describe Period
Year Ended December 31, 2001 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable ...... $ 24.3 $12.0 $14.9 (c) $27.0 (a) (e) $24.2
Allowance for obsolete materials and supplies ...... 23.3 − 9.2 (d) 8.4 (b) (f) 24.1
Year Ended December 31, 2002 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable ...... 24.2 16.6 − 20.0 (a) 20.8
Allowance for obsolete materials and supplies ...... 24.1 0.3 0.7 (g) 6.5 (b) (h) (i) 18.6
Year Ended December 31, 2003 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable ...... 20.8 24.4 − 16.1 (a) 29.1
Allowance for obsolete materials and supplies ...... $18.6 $ 0.9 $ 0.2 (l) $ 2.2 (b) (j) (k) $17.5 ______(a) Uncollectible accounts receivable written off, net of recoveries. (b) Obsolete materials and supplies written off, net of scrap. (c) Amount includes $15.0 relating to the allowance for doubtful accounts receivable assumed in the R&B Falcon merger. (d) Amount includes $8.7 relating to the obsolete materials and supplies inventory assumed in the R&B Falcon merger. (e) Amount includes $4.9 related to adjustments to the provision. (f) Amount includes $2.7 related to sale of rigs. (g) Amount includes $0.4 related to adjustments to the provision. (h) Amount includes $0.8 related to sale of rigs/inventory. (i) Amount includes $3.7 related to adjustments to the provision. (j) Amount includes $0.8 related to sale of rigs/inventory. (k) Amount includes $0.9 related to adjustments to the provision. (l) Amount includes $0.2 related to adjustments to the provision.
Other schedules are omitted either because they are not required or are not applicable or because the required information is included in the financial statements or notes thereto.
F-46 (3) Exhibits
The following exhibits are filed in connection with this Report:
Number Description
2.1 Agreement and Plan of Merger dated as of August 19, 2000 by and among Transocean Inc., Transocean Holdings Inc., TSF Delaware Inc. and R&B Falcon Corporation (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus dated October 30, 2000 included in a 424(b)(3) prospectus filed by the Company on November 1, 2000)
2.2 Agreement and Plan of Merger dated as of July 12, 1999 among Schlumberger Limited, Sedco Forex Holdings Limited, Transocean Offshore Inc. and Transocean SF Limited (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus dated October 27, included in a 424(b)(3) prospectus filed by the Company on November 1, 2000)
2.3 Distribution Agreement dated as of July 12, 1999 between Schlumberger Limited and Sedco Forex Holdings Limited (incorporated by reference to Annex B to the Joint Proxy Statement/Prospectus dated October 27, included in a 424(b)(3) prospectus filed by the Company on November 1, 2000)
2.4 Agreement and Plan of Merger and Conversion dated as of March 12, 1999 between Transocean Offshore Inc. and Transocean Offshore (Texas) Inc. (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of Transocean Offshore (Texas) Inc. filed on April 8, 1999 (Registration No. 333-75899))
2.5 Agreement and Plan of Merger dated as of July 10, 1997 among R&B Falcon, FDC Acquisition Corp., Reading & Bates Acquisition Corp., Falcon Drilling Company, Inc. and Reading & Bates Corporation (incorporated by reference to Exhibit 2.1 to R&B Falcon's Registration Statement on Form S-4 dated November 20, 1997)
2.6 Agreement and Plan of Merger dated as of August 21, 1998 by and among Cliffs Drilling Company, R&B Falcon Corporation and RBF Cliffs Drilling Acquisition Corp. (incorporated by reference to Exhibit 2 to R&B Falcon's Registration Statement No. 333-63471 on Form S-4 dated September 15, 1998)
3.1 Memorandum of Association of Transocean Sedco Forex Inc., as amended (incorporated by reference to Annex E to the Joint Proxy Statement/Prospectus dated October 30, 2000 included in a 424(b)(3) prospectus filed by the Company on November 1, 2000)
3.2 Articles of Association of Transocean Sedco Forex Inc., as amended (incorporated by reference to Annex F to the Joint Proxy Statement/Prospectus dated October 30, 2000 included in a 424(b)(3) prospectus filed by the Company on November 1, 2000)
3.3 Certificate of Incorporation on Change of Name to Transocean Inc. (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q for the quarter ended June 30, 2002)
4.1 Indenture dated as of April 15, 1997 between the Company and Texas Commerce Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K dated April 29, 1997)
4.2 First Supplemental Indenture dated as of April 15, 1997 between the Company and Texas Commerce Bank National Association, as trustee, supplementing the Indenture dated as of April 15, 1997 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K dated April 29, 1997)
4.3 Second Supplemental Indenture dated as of May 14, 1999 between the Company and Chase Bank of Texas, National Association, as trustee (incorporated by reference to Exhibit 4.5 to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 333-59001-99))
F-47 4.4 Third Supplemental Indenture dated as of May 24, 2000 between the Company and Chase Bank of Texas, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on May 24, 2000)
4.5 Fourth Supplemental Indenture dated as of May 11, 2001 between the Company and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)
4.6 Form of 7.45% Notes due April 15, 2027 (incorporated by reference to Exhibit 4.3 to the Company's Form 8-K dated April 29, 1997)
4.7 Form of 8.00% Debentures due April 15, 2027 (incorporated by reference to Exhibit 4.4 to the Company's Form 8-K dated April 19, 1997)
4.8 Form of Zero Coupon Convertible Debenture due May 24, 2020 between the Company and Chase Bank of Texas, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on May 24, 2000)
4.9 Form of 1.5% Convertible Debenture due May 15, 2021 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated May 8, 2001)
4.10 Form of 6.625% Note due April 15, 2011 (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated March 30, 2001)
4.11 Form of 7.5% Note due April 15, 2031 (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated March 30, 2001)
4.12 Officers' Certificate establishing the terms of the 6.50% Notes due 2003, 6.75% Notes due 2005, 6.95% Notes due 2008, 7.375% Notes due 2018, 9.125% Notes due 2003 and 9.50% Notes due 2008 (incorporated by reference to Exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001)
4.13 Officers' Certificate establishing the terms of the 7.375% Notes due 2018 (incorporated by reference to Exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001)
4.14 Indenture dated as of April 14, 1998, between R&B Falcon Corporation, as issuer, and Chase Bank of Texas, National Association, as trustee, with respect to Series A and Series B of each of $250,000,000 6 1/2% Senior Notes due 2003, $350,000,000 6 3/4% Senior Notes due 2005, $250,000,000 6.95% Senior Notes due 2008, and $250,000,000 7 3/8% Senior Notes due 2018 (incorporated by reference to Exhibit 4.1 to R&B Falcon's Registration Statement No. 333-56821 on Form S-4 dated June 15, 1998)
4.15 First Supplemental Indenture dated as of February 14, 2002 between R&B Falcon Corporation and The Bank of New York (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001)
4.16 Second Supplemental Indenture dated as of March 13, 2002 between R&B Falcon Corporation and The Bank of New York (incorporated by reference to Exhibit 4.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001)
4.17 Indenture dated as of December 22, 1998, between R&B Falcon Corporation, as issuer, and Chase Bank of Texas, National Association, as trustee, with respect to $400,000,000 Series A and Series B 9 1/8% Senior Notes due 2003, and 9 1/2% Senior Notes due 2008 (incorporated by reference to Exhibit 4.21 to R&B Falcon's Annual Report on Form 10-K for 1998)
4.18 First Supplemental Indenture dated as of February 14, 2002 between R&B Falcon Corporation and The Bank of New York (incorporated by reference to Exhibit 4.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001)
F-48 4.19 Warrant Agreement, including form of Warrant, dated April 22, 1999 between R&B Falcon and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to R&B Falcon's Registration Statement No. 333-81181 on Form S-3 dated June 21, 1999)
4.20 Supplement to Warrant Agreement dated January 31, 2001 among Transocean Sedco Forex Inc., R&B Falcon Corporation and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000)
4.21 Registration Rights Agreement dated April 22, 1999 between R&B Falcon and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.2 to R&B Falcon's Registration Statement No. 333-81181 on Form S-3 dated June 21, 1999)
4.22 Supplement to Registration Rights Agreement dated January 31, 2001 between Transocean Sedco Forex Inc. and R&B Falcon Corporation (incorporated by reference to Exhibit 4.30 to the Company's Annual Report on Form 10- K for the year ended December 31, 2000)
4.23 Exchange and Registration Rights Agreement dated April 5, 2001 by and between the Company and Goldman, Sachs & Co., as representatives of the initial purchasers (incorporated by reference to the Company's Current Report on Form 8-K dated March 30, 2001)
4.24 Note Agreement dated as of January 30, 2001 among Delta Towing, LLC, as Borrower, R&B Falcon Drilling USA, Inc., as RBF Noteholder and Beta Marine Services, L.L.C., as Beta Noteholder (incorporated by reference to Exhibit 4.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000)
†4.25 Revolving Credit Agreement dated December 16, 2003 among Transocean Inc., the lenders party thereto, Suntrust Bank, as administrative agent, Citibank, N.A. and Bank of America, N.A., as co-syndication agents, The Royal Bank of Scotland plc and Bank One, NA, as co-documentation agents, Wells Fargo Bank, N.A. and UBS Loan Finance LLC, as managing agents, The Bank of New York, Den Norske Bank ASA and HSBC Bank USA, as co- agents, and Citigroup Global Markets Inc. and Suntrust Capital Markets, Inc., as co-lead arrangers
10.1 Tax Sharing Agreement between Sonat Inc. and Sonat Offshore Drilling Inc. dated June 3, 1993 (incorporated by reference to Exhibit 10-(3) to the Company's Form 10-Q for the quarter ended June 30, 1993)
*10.2 Performance Award and Cash Bonus Plan of Sonat Offshore Drilling Inc. (incorporated by reference to Exhibit 10-(5) to the Company's Form 10-Q for the quarter ended June 30, 1993)
*10.3 Form of Sonat Offshore Drilling Inc. Executive Life Insurance Program Split Dollar Agreement and Collateral Assignment Agreement (incorporated by reference to Exhibit 10-(9) to the Company's Form 10-K for the year ended December 31, 1993)
*10.4 Employee Stock Purchase Plan, as amended and restated effective January 1, 2000 (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (Registration No. 333-94551) filed January 12, 2000)
*10.5 First Amendment to the Amended and Restated Employee Stock Purchase Plan of Transocean Inc., effective as of January 31, 2001 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000)
*10.6 Amended and Restated Long-Term Incentive Plan of Transocean Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2003)
*10.7 Form of Employment Agreement dated May 14, 1999 between J. Michael Talbert, Robert L. Long, Donald R. Ray, Eric B. Brown and Barbara S. Koucouthakis, individually, and the Company (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1999)
F-49 *10.8 Deferred Compensation Plan of Transocean Offshore Inc., as amended and restated effective January 1, 2000 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999)
*10.9 Employment Matters Agreement dated as of December 13, 1999 among Schlumberger Limited, Sedco Forex Holdings Limited and Transocean Offshore Inc. (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Registration No. 333-94551) filed January 12, 2000)
*10.10 Sedco Forex Employees Option Plan of Transocean Sedco Forex Inc. effective December 31, 1999 (incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-8 (Registration No. 333-94569) filed January 12, 2000)
*10.11 Employment Agreement dated September 22, 2000 between J. Michael Talbert and Transocean Offshore Deepwater Drilling Inc. (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 2000)
*10.12 Agreement dated October 10, 2002 by and among Transocean Inc., Transocean Offshore Deepwater Drilling Inc. and J. Michael Talbert (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated October 10, 2002)
*10.13 Employment Agreement dated September 17, 2000 between Robert L. Long and Transocean Offshore Deepwater Drilling Inc. (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter ended September 30, 2000)
*10.14 Agreement dated May 9, 2002 by and among Transocean Offshore Deepwater Drilling Inc. and Robert L. Long (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K dated October 10, 2002)
*10.15 Employment Agreement dated September 20, 2000 between Eric B. Brown and Transocean Offshore Deepwater Drilling Inc. (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q for the quarter ended September 30, 2000)
*10.16 Employment Agreement dated October 4, 2000 between Barbara S. Koucouthakis and Transocean Offshore Deepwater Drilling Inc. (incorporated by reference to Exhibit 10.7 to the Company's Form 10-Q for the quarter ended September 30, 2000)
*10.17 Employment Agreement dated July 15, 2002 by and among R&B Falcon Corporation, R&B Falcon Management Services, Inc. and Jan Rask (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2002)
*10.18 Amendment No. 1 dated December 12, 2003 to the Employment Agreement dated July 15, 2002 by and among Jan Rask, R&B Falcon Management Services, Inc. and R&B Falcon Corporation (incorporated by reference to Exhibit 10.8 to TODCO’s Registration Statement No. 333-101921 on Form S-1 dated February 3, 2004)
*10.19 Consulting Agreement dated January 31, 2001 between Paul B. Loyd, Jr. and R&B Falcon Corporation (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)
*10.20 Consulting Agreement dated December 13, 1999 between Victor E. Grijalva and Transocean Offshore Inc. (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001)
*10.21 Amendment to Consulting Agreement between Transocean Offshore Inc. (now known as Transocean Inc.) and Victor E. Grijalva dated October 10, 2002 (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K dated October 10, 2002)
F-50 *10.22 1992 Long-Term Incentive Plan of Reading & Bates Corporation (incorporated by reference to Exhibit B to Reading & Bates' Proxy Statement dated April 27, 1992)
*10.23 1995 Long-Term Incentive Plan of Reading & Bates Corporation (incorporated by reference to Exhibit 99.A to Reading & Bates' Proxy Statement dated March 29, 1995)
*10.24 1995 Director Stock Option Plan of Reading & Bates Corporation (incorporated by reference to Exhibit 99.B to Reading & Bates' Proxy Statement dated March 29, 1995)
*10.25 1997 Long-Term Incentive Plan of Reading & Bates Corporation (incorporated by reference to Exhibit 99.A to Reading & Bates' Proxy Statement dated March 18, 1997)
*10.26 1998 Employee Long-Term Incentive Plan of R&B Falcon Corporation (incorporated by reference to Exhibit 99.A to R&B Falcon's Proxy Statement dated April 23,1998)
*10.27 1998 Director Long-Term Incentive Plan of R&B Falcon Corporation (incorporated by reference to Exhibit 99.B to R&B Falcon's Proxy Statement dated April 23,1998)
*10.28 1999 Employee Long-Term Incentive Plan of R&B Falcon Corporation (incorporated by reference to Exhibit 99.A to R&B Falcon's Proxy Statement dated April 13, 1999)
*10.29 1999 Director Long-Term Incentive Plan of R&B Falcon Corporation (incorporated by reference to Exhibit 99.B to R&B Falcon's Proxy Statement dated April 13, 1999)
10.30 Memorandum of Agreement dated November 28, 1995 between Reading and Bates, Inc., a subsidiary of Reading & Bates Corporation, and Deep Sea Investors, L.L.C. (incorporated by reference to Exhibit 10.110 to Reading & Bates' Annual Report on Form 10-K for 1995)
10.31 Amended and Restated Bareboat Charter dated July 1, 1998 to Bareboat Charter M. G. Hulme, Jr. dated November 28, 1995 between Deep Sea Investors, L.L.C. and Reading & Bates Drilling Co., a subsidiary of Reading & Bates Corporation (incorporated by reference to Exhibit 10.177 to R&B Falcon's Annual Report on Form 10-K for the year ended December 31, 1998)
10.32 Agreement dated as of August 31, 1991 among Reading & Bates, Arcade Shipping AS and Sonat Offshore Drilling, Inc. (incorporated by reference to Exhibit 10.40 to Reading & Bates' Annual Report on Form 10-K for the year ended December 30, 1991)
10.33 Master Separation Agreement dated February 4, 2004 by and among Transocean Inc., Transocean Holdings Inc. and TODCO (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated March 2, 2004)
10.34 Tax Sharing Agreement dated February 4, 2004 between Transocean Holdings Inc. and TODCO (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K dated March 2, 2004)
10.35 Transition Services Agreement dated February 4, 2004 between Transocean Holdings Inc. and TODCO (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K dated March 2, 2004)
10.36 Employee Matters Agreement dated February 4, 2004 by and among Transocean Inc., Transocean Holdings Inc. and TODCO (incorporated by reference to Exhibit 99.5 to the Company’s Current Report on Form 8-K dated March 2, 2004)
10.37 Registration Rights Agreement dated February 4, 2004 between Transocean Inc. and TODCO (incorporated by reference to Exhibit 99.6 to the Company’s Current Report on Form 8-K dated March 2, 2004)
†21 Subsidiaries of the Company
F-51 †23.1 Consent of Ernst & Young LLP
†24 Powers of Attorney
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Compensatory plan or arrangement. †Filed herewith.
Exhibits listed above as previously having been filed with the Securities and Exchange Commission are incorporated herein by reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934 and made a part hereof with the same effect as if filed herewith.
Certain instruments relating to long-term debt of the Company and its subsidiaries have not been filed as exhibits since the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each such instrument to the Commission upon request.
Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 28, 2003 (information furnished not filed) announcing the third quarter 2003 financial results.
F-52 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on March 15, 2004.
TRANSOCEAN INC. By: /s/ Gregory L. Cauthen Gregory L. Cauthen Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 15, 2004
Signature Title
/s/ J. Michael Talbert Chairman of the Board of Directors J. Michael Talbert
/s/ Robert L. Long President and Chief Executive Officer Robert L. Long (Principal Executive Officer)
/s/ Gregory L. Cauthen Senior Vice President and Chief Financial Officer Gregory L. Cauthen (Principal Financial and Accounting Officer)
* Director Victor E. Grijalva
* Director Arthur Lindenauer
* Director Paul B. Loyd, Jr.
* Director Martin B. McNamara
* Director Roberto Monti
F-53 Signature Title
* Director Richard A. Pattarozzi
* Director Kristian Siem
* Director Ian C. Strachan
By /s/ William E. Turcotte William E. Turcotte (Attorney-in-Fact)
F-54 CEO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert L. Long, certify that:
1. I have reviewed this annual report on Form 10-K of Transocean Inc.,
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
c) disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2004 /s/ Robert L. Long Robert L. Long President and Chief Executive Officer
F-55 CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory L. Cauthen, certify that:
1. I have reviewed this annual report on Form 10-K of Transocean Inc.,
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
c) disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2004 /s/ Gregory L. Cauthen Gregory L. Cauthen Senior Vice President and Chief Financial Officer
F-56 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Robert L. Long, President and Chief Executive Officer of Transocean Inc., a Cayman Islands corporation (the “Company”), hereby certify, to my knowledge, that:
(1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert L. Long Dated: March 15, 2004 Name: Robert L. Long President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to Transocean Inc. and will be retained by Transocean Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
F-57 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Gregory L. Cauthen, Senior Vice President and Chief Financial Officer of Transocean Inc., a Cayman Islands corporation (the “Company”), hereby certify, to my knowledge, that:
(1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 15, 2004 /s/ Gregory L. Cauthen Name: Gregory L. Cauthen Senior Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to Transocean Inc. and will be retained by Transocean Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
F-58 SUPPLEMENT TO PROXY STATEMENT
March 23, 2004
SUPPLEMENT TO PROXY STATEMENT FOR ANNUAL GENERAL MEETING OF TRANSOCEAN INC. MAY 13, 2004
The following information, being mailed to shareholders on or about March 29, 2004, supplements and amends the notice of the 2004 annual general meeting of shareholders and the accompanying proxy statement, each dated March 19, 2004, furnished in connection with the solicitation of proxies by the board of directors of Transocean Inc. for use at its annual general meeting to be held on Thursday, May 13, 2004 at 9:00 a.m., at the Royal Pavilion Hotel, St. James, Barbados.
The information contained in this supplement should be read in conjunction with the proxy statement. There is no change in the time or place of the annual general meeting or the record date to determine shareholders entitled to notice of and to vote at the annual general meeting.
In early 2004, the board of directors began seeking to identify potential director candidates in an effort to add independent directors to the board. At the time of its last meeting, the board had identified one such candidate, Mr. Robert M. Sprague, who has been nominated for election to the board at the upcoming annual general meeting. In connection with the board’s current search efforts to add an independent director in addition to Mr. Sprague, it has identified potential director candidates and is in the process of conducting its normal investigation relative to the background and qualifications of certain of these individuals. After the printing of our proxy statement, it was determined that the investigation process would likely be completed for one or more of the individuals prior to the meeting of the board of directors following the annual general meeting.
If this investigation process is concluded as anticipated, it is expected that the board will consider increasing the size of the board from 11 to 12 at this upcoming meeting and appointing one of these potential candidates to fill the new board seat resulting from the increase in board size. If a director were to be appointed, it is expected that the director would be placed in the class of directors with terms expiring in 2005. The candidates currently under consideration were initially identified by a search firm retained by the Corporate Governance Committee. The search firm is assisting us in identifying potential board candidates, interviewing those candidates and conducting investigations relative to their background and qualifications.
S-1
CONTENTS BOARD OF DIRECTORS CORPORATE INFORMATION
Shareholders' Letter J. MICHAEL TALBERT Houston Office Chairman Transocean Inc. Notice of 2004 Annual General Meeting and Proxy Statement Transocean Inc. 4 Greenway Plaza Houston,Texas Houston,Texas 77046 713.232.7500 2003 Annual Report to Shareholders VICTOR E. GRIJALVA Chairman Internet Address: http://www.deepwater.com Supplement to Proxy Statement Hanover Compressor Company Houston,Texas
ARTHUR LINDENAUER Transfer Agent and Registrar ABOUT TRANSOCEAN INC. Retired Executive Vice President-Finance and Chief Financial Officer The Bank of New York Schlumberger Limited P.O. Box 11258 New York, New York Church Street Station We are the world's largest offshore drilling contractor with full or partial ownership in 96 mobile offshore drilling units, excluding the New York,New York 10286 ROBERT L. LONG 1.877.397.7229 70-rig fleet of TODCO, a publicly traded drilling company in which we own a majority interest. Our mobile offshore drilling fleet is President and Chief Executive Officer considered one of the most modern and versatile in the world due to our emphasis on technically demanding segments of the off- Transocean Inc. Internet Address: http://www.stockbny.com shore drilling business, including industry-leading positions in high-specification deepwater and harsh environment drilling units. We Houston,Texas E-mail Address: [email protected] have more than 10,000 employees worldwide. PAUL B. LOYD, JR. Former Chairman R&B Falcon Corporation Since launching the offshore drilling industry's first jackup drilling rig in 1954, we have achieved a long history of technological "firsts." Houston,Texas These innovations include the first dynamically positioned drillship, the first rig to drill year-round in the North Sea, the first semisub- Direct Purchase Plan mersible for sub-Arctic, year-round operations and the latest generation of ultra-deepwater semisubmersible rigs and drillships. MARTIN B. MCNAMARA The Bank of New York,the Transfer Agent for Transocean Inc., offers a Direct Purchase and Sale Plan Partner-In-Charge for the ordinary shares of Transocean Inc. called BuyDirect. For more information on the Plan, includ- Gibson, Dunn & Crutcher, LLP ing a complete enrollment package, please contact The Bank of New York at 1.877.397.7229. With an equity market capitalization in excess of $9 billion at February 27, 2004, which is the largest in the offshore drilling industry, Dallas,Texas the company's ordinary shares are traded on the New York Stock Exchange under the symbol "RIG." ROBERTO L. MONTI Auditors Retired Executive Vice President Transocean:We're never out of our depth® Exploration and Production Ernst & Young LLP Repsol YPF Houston,Texas Buenos Aires,Argentina TRANSOCEAN WORLDWIDE OPERATIONS RICHARD A. PATTAROZZI Stock Exchange Listing Retired Shell Oil Company Executive Transocean Inc. ordinary shares are listed on the New York Stock Exchange (NYSE) under the symbol Metairie, Louisiana RIG.The following table sets forth the high and low sales prices of the company’s ordinary shares for the periods indicated, as reported on the NYSE Composite Tape. KRISTIAN SIEM Norway Chairman and Chief Executive Officer 2 Siem Industries Inc. Price (in U.S. dollars) HIGH LOW 2 George Town, Cayman Islands 2002 IAN C. STRACHAN First Quarter 34.66 26.51 Chairman Second Quarter 39.33 30.00 Instinet Group Incorporated Third Quarter 31.75 19.60 UK New York, New York Fourth Quarter 25.89 18.10 2 1 2003 E. Canada 10 Caspian 1 First Quarter 24.36 19.87 Italy EXECUTIVE OFFICERS 1 Second Quarter 25.90 18.40 2 Third Quarter 22.43 18.50 Canary Islands J. MICHAEL TALBERT Fourth Quarter 24.85 18.49 1 Egypt Chairman US Gulf of Mexico UAE 5 3 1 1 3 1 SE Asia ROBERT L. LONG Financial Information 1 3 1 President and Chief Executive Officer 3 6 1 2 Financial analysts and shareholders desiring information about Transocean Inc. should write to the Investor Relations and Corporate Communications Department or call 713.232.7694. Information India JEAN P. C AHUZAC West Africa may also be obtained by visiting the company’s website at http://www.deepwater.com. 8 2 Executive Vice President and Chief Operating Officer 1 1 4 2
5 3 2 ERIC B. BROWN Australia Brazil Senior Vice President, General Counsel and Corporate Secretary 2 2 1 GREGORY L. CAUTHEN 2 2 Senior Vice President and Chief Financial Officer 2 TIM L. JURAN Vice President, Human Resources
BARBARA S. KOUCOUTHAKIS Vice President and Chief Information Officer 5th Generation Deepwater Drillships Other Deepwater1 Drillships Other High Specification Semisubmersibles Other Semisubmersibles Inland Barges JAN RASK 5th Generation Deepwater Semisubmersibles Other Deepwater Semisubmersibles Other Drillships Jackups Tenders President and Chief Executive Officer,TODCO
As of February 27, 2004. Excludes our platform drilling unit, mobile offshore production unit, land rig and coring drillship and the 70-rig fleet of TODCO, a publicly traded drilling company in which we own a majority interest. For a complete listing of our fleet, see pages A-6 to A-9.
About the Cover: The Discoverer Deep Seas, for the first time in the offshore drilling industry's history, drilled in more than 10,000 feet of water, setting a new world water-depth drilling record at 10,011 feet of water in November 2003 for ChevronTexaco in the U.S.Gulf of Mexico. The Discoverer Deep Seas is one of 32 high-specification drillships and semisubmersibles in Transocean's fleet,28 of which form the world's largest deepwater drilling rig fleet capable of working in more than 4,500 feet of water.
Forward-Looking Statements: Any statements included in this Proxy Statement and 2003 Annual Report that are not historical facts, including without limitation statements regarding future results and operations, are forward-looking statements within the meaning of applicable securities laws. Such statements are subject to numerous risks and uncertainties (including, but not limited to, those that can be found on pages A-46 to A-50 of this Proxy Statement and 2003 Annual Report) that could cause actual results to differ materially from those projected. www.deepwater.com
4 Greenway Plaza Houston,TX 77046 713.232.7500
2003PROXY STATEMENT & 2003 ANNUAL REPORT